By Kate Gibson
As crude oil on Friday hit a high for the year above $74 a
barrel, energy shares rallied, fueling the broader U.S. stock
market toward weekly gains. But if oil continues to rise, what's
been viewed as a bullish signal could turn bearish for U.S. equity
investors.
"If it jumps back up to $140 (a barrel,) for the U.S. economy
that is broadly negative. If it drops back to $40, it's a positive
in the short term, since it's a tax break for consumers and
businesses. The opposite is true when prices are going up," said
Ryan Brecht, senior economist North America, Action Economics.
Asked at what price level the stock market would no longer be
applauding crude's rise, Dan Greenhaus, chief economic strategist,
Miller Tabak & Co. replied: "Well, last year we found out that
around $100, the market took notice."
Positive U.S. and European economic data, along with weakness in
the dollar, helped support oil's surge, pushed the front-month
futures contract as high as $74.72 a barrel, its loftiest level so
far this year, before pulling back modestly but still holding above
the $74 mark. .
Crude futures have had "trouble staying above $73" and hence had
been trading in a range of $65 to $73 a barrel, said Kevin
Kruszenski, director of equity trading, KeyBanc Capital Markets
Inc.
"So today it's a focus, since we're at a very important level,"
he said.
While crude's climb on Friday had it rallying to its highest
point yet for the year, a barrel of oil remains roughly half of
where it stood at its height last summer, when crude-oil futures on
July 11 hit an intraday high of $146.65, with the Dow industrials
shed 129 points that day.
"A year or so ago, higher (oil) prices were bad for the stock
market, now the inverse is true. It's seen as a sign of economic
recovery," Kruszenski said.
Rising energy costs would be seen in a less favorable light
should the price of crude climb back over $100 a barrel, Kruszenski
said. That said, it's unlikely that that would happen anytime soon,
he added.
"It's too early in the economic recovery. I don't think there is
enough business or consumer activity," said Kruszenski.
On Wall Street, energy shares fronted the broad market's advance
to close out the week, with shares of drilling services provider
Cameron International Corp. (CAM) up nearly 5%.
On the Dow Jones Industrial Average (DJI), shares of oil
goliaths Chevron Corp. and Exxon Mobil both advanced nearly 2%,
with the Dow lately at 9,489.71, up 139.89, or 1.5%.
As for the other major equties benchmarks, the S&P 500 Index
(SPX) climbed 16.73 points, or 1.7%, to 1,024.10 and the Nasdaq
Composite Index (RIXF) rose 26.8 points, or 1.4%, to 2,016.02.