Oil prices took a nose dive yesterday morning but recovered enough to contribute to a drop in the stock market.
In financial markets distinguished mostly by their continuing volatility and the way in which developments in one market set off charges in other markets, the dollar reached record lows, the Dow Jones industrial average dropped 50.07 points to 1924.40, and Treasury notes and bonds rose and then fell in counterpoint to oil prices, which continued to reflect massive uncertainty about production and long-term oil prices.
On the New York Mercantile Exchange, the price of a key grade of oil, West Texas intermediate, dropped through the $15 level to $14.90 a barrel in early trading before rallying.
That rally was only relative, however, in a week that has seen oil prices drop by more than $2 a barrel in the wake of the failure by the Organization of Petroleum Exporting Countries to reduce production. West Texas intermediate ended yesterday at $15.84 a barrel -- far below its peak last summer of $22. Yesterday's closing price is equivalent to about $14.34 for the key grade of OPEC oil, Saudi Arabian light crude.
Despite the dramatic drop in prices for futures contracts in oil, several analysts said they expect oil prices to stabilize at a price higher than the swings in futures trading might suggest. Even so, those oil prices will be below the $18-a-barrel official OPEC price and low enough to reduce the prospect of inflation in 1988.
"I think that what happens is that in any futures market for commodities there is a lot of expectation and frequently those markets overreact," said Joel Popkin, a price analyst. Popkin said that lower oil prices would help reduce inflation rates for the first half of 1988, but that wage rate pressures and pressures from higher import prices would continue to exert pressure on the consumer price index.
"It's sort of what you expect when a commodity market takes a psychological shock," said Philip K. Verleger Jr., a visiting fellow at the Institute for International Economics. Verleger said he expected prices to decline for a month or two but then to return to higher levels. If major OPEC producers were to return to a form of discount pricing that they adopted in 1986, however, prices might go lower still, he said.
"I think that we've seen since the OPEC meeting a succession of price declines that are a vote of no-confidence in OPEC's ability to curb production," said Sanford L. Margoshes, an oil industry analyst with Shearson Lehman Bros. Inc. "The question is, is that a too hastily drawn conclusion or not?" Margoshes said he believes that producers may reduce output in order to stop the slide in prices.
In other oil market developments yesterday, OPEC member Venezuela dropped its heavy crude prices $2 and $2.50 a barrel, and Exxon Corp. and Chevron Corp. lowered the price they will pay for West Texas intermediate by $1 to $17. Coastal Refining & Marketing and Permian Corp. lowered their posted prices by $1 also, to $16.50.
Charles Lieberman, managing director of Manufacturers Hanover Securities Corp., said that the stock market yesterday reacted to the afternoon rally in the price of oil and to the expectation that the dollar would continue to fall. "Although the stock market was weak most of the day it weakened particularly at the close, after the bond market had weakened and the price of oil had recovered," he said.
Declining issues outnumbered advances by about 8 to 5 on the New York Stock Exchange. Big Board volume totaled 191.78 million shares, compared with 193.82 million in the previous session.
Standard & Poor's index of 400 industrials dropped 6.14 to 280.38, and S&P's 500-stock composite index was down 5.10 at 242.98.
Prices of bonds, which are fixed-income securities, generally go up in anticipation of price stability and down in anticipation of inflation. As a result, they swing in the opposite direction from oil prices.
As oil prices fell in early trading yesterday, bond prices gained, with 30-year Treasury notes gaining more than $10 for every $1,000 in face amount, then falling about $1.25.
Another factor in the stock market's decline, according to Lieberman, was an assertion by former Council of Economic Advisers member Martin Feldstein that the dollar needs to fall further to 100 yen in order to help reduce the U.S. trade deficit.
The dollar closed in New York at 125.80 yen, a postwar low.