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Market Beware: 'October Surprise' Could Be a Doozie for Oil Prices By Aaron L. Task Senior Writer 9/28/00 8:53 PM ET

SAN FRANCISCO -- As if on command (call me The Great Santini, if you wish), major stock proxies rallied smartly Thursday. The Dow Jones Industrial Average climbed 1.8%, the S&P 500 2.2%, and the Nasdaq Composite 3.3%.

Better still for those long, market internals were solidly positive. In New York Stock Exchange activity, advancers bested declining stocks by nearly two to one with 1.2 billion shares trading. In over-the-counter trading, gainers led 13 to seven on nearly 2 billion shares. Meanwhile, up volume accounted for nearly 75% of the total on each exchange.

The market was spurred by various forces, including the coming end-of-quarter, positive comments (for a change) from a blue-chip company -- Procter & Gamble (PG:NYSE - news) -- and a sense that many big-cap technology stocks are oversold. Notably, WorldCom (WCOM:Nasdaq - news), Lucent (LU:NYSE - news) and Gateway (GTW:NYSE - news) each rose more than 8%. The ability of Nortel (NT:NYSE - news) and Cisco (CSCO:Nasdaq - news) to rise -- over 3% each -- in the face of a much-anticipated downgrade by Sanford Bernstein contributed to and imbued the glad tidings.

Another factor, overlooked in some circles, was oil prices, which continued their weeklong slide after Saudi Arabian Crown Prince Abdullah bin Abdulaziz al-Saud said his nation is "ready to supply whatever amount necessary to stabilize the world market," according to wire service reports from the OPEC meeting in Caracas. In New York Mercantile Exchange trading, crude prices fell 3.7% to $30.30, the lowest closing price since Aug. 8.

When I wrote last night that stock averages were due for a bounce but that you shouldn't get too excited, the unwritten implication was that a downturn would follow. Given that everyone is already worried about third-quarter earnings -- Apple (AAPL:Nasdaq - news) being the latest to warn of weaker-than-expected results -- that's unlikely to be the cause of the next market swoon. Another spike in oil prices could be though, if only because so few seem to be expecting it.

Oil analysts generally agree that crude prices have peaked, questioning only at what levels they'll settle. While crassly political and limited in its practical effect, the Clinton Administration's decision to release 30 million barrels from the strategic reserve seems to have succeeded in bringing prices down.

However, the action could "harden OPEC because they were under tremendous pressure to release additional oil," notes Fadel Gheit, energy analyst at Fahnestock. "It has set the stage for a big confrontation: Now OPEC can say, 'Why should we [increase production] if you can do it yourself?' "

Gheit was harshly critical of Clinton/Gore energy policies, noting that the U.S. did little to aid the economies of oil-producing nations when crude prices plummeted in 1998 and 1999. Our cries for relief as soon as prices spiked is "despicable," he said, adding that government policies ostensibly aimed at helping the environment have crippled the U.S. energy industry, making us more reliant than ever on foreign production. Nonetheless, the analyst believes crude prices have peaked.

So, too, does Tom Petrie, CEO of Petrie Parkman, an energy investment firm in Denver. However, Petrie said there's a risk prices will reverse their downward path, particularly if Iraq decides to cut production -- a threat Gheit also mentioned.

Thursday, the United Nations approved Kuwait's near $16 billion claim against Iraq for lost oil production following the latter's brutal invasion of the former in 1990. Petrie called the claim "a mortgage on future production" by Iraq, expressing some concern that Saddam Hussein will take the opportunity to thumb his nose at the world once again.

Iraq produces 2.5 million barrels of oil a day, which Fahnestock's Gheit notes "the rest of the world does not have the additional capacity" to replace if Saddam were to say, "Screw OPEC, I'm going to stop production."

Now ask yourself, who would Saddam rather see win the election: the son of the man who was commander-in-chief during the Gulf War -- whose running mate happened to be secretary of defense at the time (oh, to be as rich as that irony), or Al Gore, the sidekick to the latest American president unable to subdue Saddam, whose running mate happens to be of a religion the dictator finds abhorrent (not that he's terribly tolerant of many others)?

If the answer is George W. Bush, Saddam might give new meaning to the phrase "October Surprise" -- to both Al Gore and equity investors alike. If it's Gore, any attempt to manipulate prices would wait until after the elections, meaning investors might enjoy a bit of a reprieve (which might lull some into a false sense of security).

So it seems the "Butcher of Baghdad" holds the key to near-term oil prices, which, in turn, will have a great deal to say about how Wall Street concludes what has already been a most unpleasant year. (Can't somebody get rid of this guy?)

Many readers will no doubt quibble with my Saddam theory. But to anyone who thinks that oil doesn't matter a heck of a lot more than B2B or fiber optics or biotech or whatever, I have to wonder if it wasn't you who's just returned from an extended vacation.

http://www.thestreet.com/markets/aarontaskfree/1103132.html

-- Martin Thompson (mthom1927@aol.com), September 28, 2000

Answers

This is a fine, informative analysis, as far as it goes, but I'm afraid I don't quite get his conclusion.

-- QMan (qman@c-zone.net), September 28, 2000.

I don't quite get it either....but I do tend to think that the retaliation would be against Clinton for the frequent, free and easy bombings. I think the uproar over Kuwait stealng Iraqi oil was a hint.

-- R2D2 (r2d2@earthend.net), September 28, 2000.