Yet once again. Aivars Lode
Commodity Prices Plunge .Article Video Comments more in Markets Main
By LIAM PLEVEN
Commodities prices tumbled on Thursday, led by the steepest oil-price decline in more than two years, triggering a selloff in stocks as well.
The Dow Jones Industrial Average fell 139.41 points, or 1.1%, to close at 12584.17, making the Dow's two-day slide its worst in nearly two months. The stock market previously had been mostly spared from the week-long downturn in raw-materials prices.
A surging dollar and a collapse in oil prices roiled commodity markets, as fears grow that high energy costs are undermining the global economic recovery. WSJ's Liam Denning and Oppenheimer oil & gas analyst Fadel Gheit discuss.
."It's a mass liquidation. I think it's just hedge funds got scared and everyone's running for the door right now," said Frank Cholly, senior market strategist with Lind-Waldock. "It just seems to be contagion."
Worries about overheated markets appear to have sparked the selling, which has been gathering steam all week. If raw-materials prices continue to drop, it will ease pressure on companies grappling with higher production costs and on consumers reeling from $4-a-gallon gasoline and rising food prices.
But commodities investors and analysts say that the global appetite for natural resources remains robust, which is likely to keep prices from falling dramatically for long.
Oil fell 8.6% on Thursday to $99.80 a barrel, the lowest closing price since mid-March. Copper, another closely watched economic barometer, shed 3% for the second day in a row, while cotton and sugar also fell, continuing their recent slides.
"We see funds and speculators looking at their balance sheets and seeing commodities and wanting to remove that risk," said Keith Flury, an agriculture analyst at Rabobank.
..All 10 sectors of the Standard & Poor's 500-stock index finished in negative territory, with energy and materials stocks among the worst decliners. Exxon Mobil Corp. fell 2.6%, Alcoa Inc. dropped 2.6%, and Chevron Corp. declined 2%. For about 15 minutes in the last hour of trading, stocks slid rapidly, with the Dow shedding more than 200 points at one point.
After the selloff, investors were bracing for Friday's monthly jobs report, which could further rattle the markets.
The long-sagging dollar, meanwhile, got a reprieve, rising 2% against the euro after comments from European Central Bank President Jean-Claude Trichet that investors saw as a sign that a June rate increase isn't in the cards. A stronger greenback typically hurts dollar-denominated commodities, which get more expensive for buyers elsewhere.
Cheaper raw materials remove some pressure on companies to increase prices, and on consumers still wrangling with high unemployment. New filings for unemployment benefits increased last week to the highest level since last summer, according to Labor Department data released Thursday.
That, in turn, could make it less likely that the Federal Reserve will raise interest rates. Many analysts don't expect the Fed to move until 2012, at the earliest, for fear of choking off the economic recovery.
Tim Evans, an analyst at Citigroup's Citi Futures, said he doesn't expect oil's decline to translate right away into less expensive gasoline. But he said gas prices, which hit $3.96 per gallon on average Monday, may be at or near the peak for the year. U.S. oil prices have fallen for four consecutive days in the futures market, and are down 12.4% this week.
Still, even with the recent price declines, commodities from oil and copper to cotton and wheat remain far more expensive than they were a year ago.
The latest swings came amid a week-long nose dive in the silver market that accelerated Thursday with an 8% drop. As recently as Friday, silver was up 161% in a year, but it has lost a quarter of its value in four days.
Silver's sudden reversal acted as a spark, igniting the concerns of investors that commodity prices had raced too far too fast, and had become detached from the fundamental forces of supply and demand.
The latest U.S. data shows gasoline appetite basically unchanged in February from a year earlier—a sign that expensive oil and gasoline were already eroding household budgets.
"The big question always was on the demand side," said Olivier Jakob, editor of Petromatrix, an energy newsletter. Investors have already digested the impact on oil supplies from recent Middle East unrest, he added.
Farmers around the world are churning out more sugar and cotton, easing concerns about shortages that had pushed prices up dramatically last year. Cotton fell 4.5% and sugar fell 2.3% on Thursday, and are now down 23% and 41%, respectively, from their 2011 peaks.
With those declines already in motion, silver's drop fed into wider worry about whether the commodity rally might falter. But many observers still believe that the theory behind the rally that began last year—that fast-growing developing countries want to buy more often-scarce natural resources—will regain primacy soon.
Trend-following funds that use computer programs to trade rapidly can sometimes sell into market declines. "We believe they are the ones driving this selloff," said Mark Enman, head of global trading in hedge fund research at Man Investments. But, he added, commodity investors who track supply and demand are likely "buying the dip."
The dollar's sudden strength also may not last long. The drop in commodity prices hurt currencies from countries like Australia and Canada that are big raw-material producers. And some investors may have been looking to raise cash through profitable currency trades after suffering losses in the commodities, traders said.
Matthew Alexy, New York foreign exchange head for TD Securities, noted that before Thursday's selloff, the euro had risen more than 16% against the dollar from its January lows. "When you've got some big positions in the market, and the market has been trending, there are profits out there that people want to take and defend," he said.
The longer-term trends in both commodities and currencies might also depend on monetary policy. Since the Fed signaled last August that it was embarking on a second round of so-called quantitative easing, known as QE2, many commodity markets have rallied, which some observers attribute partly to a flood of cheap money from investors.
The recent selloff, by contrast, comes after the Fed last Wednesday said that it will stop its current bond-buying program in June, but signaled that it won't move quickly to increase rates. That has prompted some to question how investors will react in months to come.
"If commodities are already showing vulnerability even after the Fed confirmed its super-dovish stance," analysts at Gave-Kal said in a research note, "then what happens when QE2 ends?"
—Jonathan Cheng and Tom Lauricella contributed to this article.