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Economy: Fears of recession drive shares and oil prices down logo

Economy: Fears of recession drive shares and oil prices down

Oil prices tumbled by the biggest amount in three-and-a-half years yesterday as dealers sold on fears that the world’s leading economies are facing a sustained economic downturn.

US crude futures slumped by over $10 at one point to just below $136 a barrel, having earlier traded as high at $146.73 – less than $1 a barrel below the recent record high. It later recovered to above $137, however. London Brent fell $6.60 to $137.31 a barrel.

However, the fall was not enough to overcome stockmarket fears about the British banking sector and the FTSE 100 suffered another sharp fall, of 2.4%, to its lowest close since October 2005.

The FTSE’s fall, to 5,172, was partly due to falls in Shell and BP’s share prices in response to weakening oil prices but the main culprit were falls in bank stocks after the US Federal Reserve chairman, Ben Bernanke, warned that many markets remained under “considerable stress”.

The famous investor George Soros reiterated his view that the world was seeing “the most serious financial crisis of our lifetime”. He added that the crisis with the US mortgage groups Freddie Mac and Fannie Mae would not be the last of its kind.

Stockmarkets fell heavily in Europe and Asia too. “We’re back into the panic mode we experienced back in mid-March. The distrust is at a very high level and it is totally justified,” said Marie-Pierre Peillon, an analyst at Groupama Asset Management in Paris. “The US housing crisis is getting worse, and it has now spread from the ‘sub-prime’ segment to the ‘prime’ segment.”

The collapse of Spain’s biggest property company did not help market sentiment, with traders citing it as part of the reason behind yesterday’s sharp fall in the share price of Royal Bank of Scotland, which closed down 7%.

Martinsa-Fadesa, which builds homes, hotels and golf courses across Europe, has €5.4bn (£4.3bn) of debt owed to nearly 50 banks and had grown dramatically in recent years on the back of the boom in Spanish property. Henk Potts at Barclays agreed: “The reality is everyday investors are looking at … runaway inflation, falling house prices, weak business and consumer confidence surveys and that continues to sap away investors’ confidence.”

The oil sell-off was due to profit-taking after crude’s recent surge and relief that a strike by Brazilian oil workers was expected to have little impact on supplies.

A prediction from Opec that demand would recede in 2009 also undermined prices and offered a possible lifeline to many economies that have seen higher inflation from soaring oil and food prices.

In Wall Street, the Dow Jones Industrial Average took cheer from lower oil prices and comments from Ben Bernanke that the US banking system remained “well capitalised”. The Dow rose 40 points, or 0.4%, to 11,098, while the Nasdaq technology index was up 1%.

Bad inflation numbers in Britain spooked the foreign exchanges with the pound jumping above the $2 level for the first time since March on the view that rising inflation would force the Bank of England to raise interest rates.

The dollar was also undermined by weak US retail sales figures and strong factory-gate prices, both of which painted a “stagflationary” picture for the American economy. The greenback fell to a fresh record low against the euro of $1.604 as traders bet that the Federal Reserve was unlikely to raise interest rates soon.

The US currency also slumped 1.4% against the Japanese yen, the biggest one-day fall since mid-March, to trade at 104.7 yen.

Gold had a roller-coaster day, hitting a four-month high of $989.60 an ounce before retreating to $976.

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