Oil prices surge almost $11 and punch stocks hard
— -- Oil prices soared to a record Friday, sending stocks into a tailspin and raising fears of inflation and recession.
The price of a barrel of light, sweet crude leapt $10.75 to $138.54 Friday. It had spiked as high as $139.12.
"I think anyone who says they are not shocked would be being untruthful," says Fred Fromm, manager of Franklin Natural Resources fund.
A brutal combination of forces sent oil skyrocketing:
Israel's transportation minister said Friday that an attack on Iran was "unavoidable." Iran produces 4 million barrels of oil a day, and is the world's second-largest producer, behind Saudi Arabia .
• The U.S. dollar fell. A euro cost $1.5768 Friday, vs. $1.5593 on Thursday. Oil is priced in dollars, and when the dollar falls in value, oil prices rise.
• Investment bank Morgan Stanley predicted oil prices would hit $150 by July.
Experts also blamed a technical factor, called short-covering, for the big rise in oil prices. Making a bet on falling prices is called shorting. Traders who take short positions in the futures market have to buy oil futures to close their positions.
Sometimes that leads to a big spike upward in prices. "Short sellers have gotten squeezed," says Michael Hoover, manager of Columbia Energy and Natural Resources fund.
Oil's meteoric surge, which pushed prices more than 8% higher in a single day, added to a huge increase Thursday to cap oil's biggest two-day gain in the history of the New York Mercantile Exchange.
Oil rose $5.49 Thursday, which had been the biggest single-day price increase in the history of the Nymex crude contract.
Soaring oil prices clobbered the stock market. The Dow Jones industrial average plunged 395 points, or 3.1% to 12,210. It was the Dow's biggest point drop of 2008 and eighth-worst in its history.
The losses on Wall Street were exacerbated by the biggest monthly rise in the unemployment rate in 22 years. The jobless rate in April rose to 5.5% from 5%.
The one-two punch of skyrocketing energy costs and signs of rising joblessness raised fears of stagflation — a slow economy coupled with rising prices. "It is too much for the consumer to bear," says Gordon Fowler, chief investment officer at Glenmede Trust.
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