Stocks Fall on Oil Spike, Credit Fears

NEW YORK, May 20 -- U.S. stocks fell sharply Tuesday as concerns about surging oil prices, consumer spending and the credit crisis returned to the fore after several weeks of calm in financial markets.

The Dow Jones industrial average fell by nearly 200 points. Shares of financial companies led the declines after a widely followed analyst lowered earnings estimates for the U.S. banking sector. Oppenheimer analyst Meredith Whitney, who garnered attention late last year when she correctly predicted that Citigroup would have to cut dividends, warned that the credit crisis would "extend well into 2009 and perhaps beyond."

"The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen," Whitney wrote in the report. "Just as strained liquidity pushed so many small and mid-sized specialty finance companies to beyond the brink, we believe it will do the same with the U.S. consumer."

Financial stocks also headed lower on remarks by Federal Reserve Vice Chairman Donald Kohn that appeared to signal that the Fed was now more inclined to raise interest rates than to continue cutting them as in recent months. A boost in the federal funds rate would increase the cost when banks lend to each other.

"Monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation," Kohn said in a speech in New Orleans. Kohn made clear that inflation was very much on the minds of Fed officials, saying they were watching it closely.

His comments came as the Labor Department reported a 0.4 percent rise in its producer price index, excluding volatile food and energy prices. The jump in wholesale prices was twice as much as economists had expected.

Oil prices, meantime, jumped to $129.07 a barrel, up $2.02 on the New York Mercantile Exchange, as traders fretted over long-term crude supplies, the falling dollar and the possibility that China might need more fuel because of disruptions in coal supplies caused by the recent earthquake.

"I'm just watching the freight train," said Adam Robinson, an oil analyst at Lehman Brothers. "The rails are only going one direction."

The oil markets have also been rocked by forecasts of long-term supply problems and a further spike in prices later this year. As sharp as price increases have been for June delivery of crude oil, the increase in price for future deliveries has been even sharper. Since May 1, the price of oil for delivery in December 2012 has soared from $102 to $133 a barrel. Yesterday alone, the price of that contract shot up $6.12 a barrel.

Earlier this month, Goldman Sachs issued a report warning that oil prices could soon "spike" to about $200. Traders said that Goldman's commodity analyst held a conference call Tuesday in which he pressed his case and cast doubts on scheduled increases in supplies from Saudi Arabia and elsewhere. In addition, billionaire hedge fund manager and former oil executive T. Boone Pickens said during a morning interview on CNBC that oil prices would rise to $150 a barrel before the end of the year. He also said that global production could not rise much more.

But Guy Caruso, head of the Energy Department's Energy Information Administration, said in a separate interview on CNBC later in the day that Brazil, Canada, Kazakhstan and other non-OPEC countries would bring on new supplies later in the year, possibly putting some downward pressure on oil prices. His agency is forecasting an average price of $110 a barrel this year.

Regarding Pickens's forecast, Caruso said: "Predicting oil prices is a very risky business. Many of us have been wrong, including Mr. Pickens."