Oil Prices Hit Highest Level in Years on Supply Worries

Worries about U.S. stockpiles of gasoline and heating oil combined with war jitters Wednesday to drive oil prices to their highest level in more than 12 years. Stocks slumped in part on worries about the effect of higher crude prices on the economy.

Crude oil for April delivery jumped $1.64, or 4.5%, to $37.70 a barrel in trading on the New York Mercantile Exchange. That was the highest close since October 1990, when petroleum markets were roiled after Iraq’s invasion of Kuwait in August of that year.

“With U.S. oil inventories continuing to fall far too fast for comfort ... in the short term, a price target of $40 [a barrel] now looks to be very attainable,” said Paul Horsnell, an energy analyst with J.P. Morgan.

Higher energy prices were only part of Wall Street’s matrix of concern Wednesday. Worries over Iraq kept sentiment under a cloud while Hewlett-Packard’s lackluster sales reminded investors that the outlook for corporate earnings isn’t very bright.

“It’s the double whammy,” said David Memmott, head of listed block trading at Morgan Stanley.

“There’s Iraq, which we’ve had for a while, and oil is really affecting [the market] today. But now you throw in earnings; people have kind of overlooked that over the past two weeks.”

The blue-chip Dow Jones industrial average lost 102.52 points, or 1.3%, to 7,806.98. HP was the biggest loser on the Dow, dropping $2.81, or 15.5%, to $15.37. The broad Standard & Poor’s 500 index slipped 11.02 points, or 1.3%, to 827.55. The tech-laced Nasdaq composite index dropped 25.30 points, or 1.9%, to 1,303.68.

Losers beat winners 3 to 2 on the New York Stock Exchange and Nasdaq in active trading.

Among the day’s winners: oilfield services stocks, which rose in tandem with crude prices. Schlumberger gained 75 cents to $41.55, BJ Services rose 42 cents to $35.20 and Baker Hughes added 28 cents to $31.46. A key index of oil service shares gained 1.5%.

On the downside, American Airlines’ parent, AMR, fell 26 cents to $2.58, as higher fuel costs and worries that a Mideast war would dampen travel hit the world’s largest carrier.

Crude prices are up 80% from a year ago. Fears of a military conflict in Iraq and the effects of a long general strike in Venezuela have continued to feed concerns about tight supplies.

Those anxieties were in the spotlight again Wednesday when the government reported that last week’s massive snowstorm in the Northeast helped push U.S. heating oil inventories down by 3.9 million barrels to 36.1 million barrels -- 33% below year-ago levels.

Crude inventories last week fell 1 million barrels to 271.9 million barrels, just above the government’s minimum-operating level for U.S. refineries. Gasoline supplies dropped 3.1 million barrels to 208.1 million barrels.

Wednesday’s rally came after crude prices fell the day before, when Energy Secretary Spencer Abraham said that the government would quickly release oil from strategic stockpiles if supplies were disrupted by a U.S.-led war to disarm Iraq.

Meanwhile, Treasury bond yields declined across the board as slumping stocks drove more money to bonds, and as the Treasury drew strong bids for its auction of $27 billion in two-year notes. The auction yield was 1.58%, the lowest ever for a two-year note auction. The 10-year T-note yield fell to 3.77% from 3.82% on Tuesday, and now is the lowest since Oct. 10.

In other highlights:

* Mirant tumbled 23 cents to $1.39. The debt-strapped energy firm said it hired Blackstone Group to advise it on debt restructuring and will delay its results to finish an audit of its 2002 financial statements.

* IBM lost $1.67 to $77.40, also pressuring the Dow. The computer sector was the biggest drag on the S&P; 500 as the S&P; computer hardware index lost 5%. Dell Computer fell 73 cents to $25.78. Apple Computer slumped 52 cents to $14.50.

* The New York-traded shares of embattled Dutch retailer Ahold fell another 10%, losing 33 cents to $3.11, after the company said its accounting woes are being probed by U.S. authorities. Ahold shares have plunged 71% this week.

Market Roundup, C5-6