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Oil Prices Weigh on Stocks

Robert Holmes

Stocks closed lower for a second session Monday as oil prices surged 3%, leaving traders on edge ahead of the upcoming Federal Reserve policymaking meeting.

The Dow Jones Industrial Average lost 20.97 points, or 0.19%, to 11,219.38, and the S&P 500 fell 3.59 points, or 0.28%, at 1275.77. The Nasdaq Composite declined by 12.55 points, or 0.6%, to 2072.50. The 10-year Treasury was down 6/32 in price to yield 4.92%, while the dollar rose against the euro and fell against the yen.

Pressuring the indices was the advance in crude. The price of a barrel of oil jumped after BP(BP - Cramer's Take - Stockpickr) said it was stopping production at Prudhoe Bay in Alaska to repair a leak in a pipeline. The shutdown removes up to 400,000 barrels a day from the world's supply. In Nymex floor trading, September crude gained $2.22 to close at $76.98 a barrel, having briefly topped its all-time closing high of $77.03 intraday.

Shares of BP were lower by $2.09, or 2.9%, to $70.45. Sunoco(SUN - Cramer's Take - Stockpickr) jumped 4.9%, and Marathon Oil(MRO - Cramer's Take - Stockpickr) gained 1.8%. Dow component Exxon Mobil(XOM - Cramer's Take - Stockpickr) rose to near record highs, ending the session up 0.8% to $69.23.

By sector, the Amex Oil Index tacked on 0.7%, and the Philadelphia Oil Service Sector Index was higher by 0.6%. Both the Amex Airline Index and the Dow Jones Transportation Average dropped 1.4%.

"The equity markets are following the oil story," said Paul Nolte, director of investments with Hinsdale Associates. "The tone was set from that, but also no one wants to get a position in front of the Fed meeting tomorrow. The part no one has a clue on is exactly what will be in the statement. We need to see if the risk to the economy isn't outweighed by inflation."

The upswing in energy took some of the focus off of Tuesday's Fed meeting. On Friday, the July employment report suggested the central bank might be inclined to leave rates unchanged at 5.25% this week. The Fed has hiked rates at 17 straight meetings going back to June 2004, lifting the fed funds target rate by 425 basis points from 1%. Following the report, the futures market was pricing in 18% odds of a rate increase.

Volume was light ahead of the Fed's announcement Tuesday. About 1.35 billion shares changed hands on the New York Stock Exchange, with decliners beating advancers by a 5-to-3 margin. On the Nasdaq 1.46 billion shares traded, and losers outpaced winners more than 2 to 1.

To view Gregg Greenberg's video take on today's market, click here.

"Even if the Fed pauses, the market now has mostly discounted the move, or lack thereof," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Earnings are mostly behind us, inflation will persist as a problem, the midterm elections are coming up, and all eyes will soon shift to the Fed meeting in September."

Among earnings, natural gas company El Paso(EP - Cramer's Take - Stockpickr) said second-quarter net income rose to $141 million, or 21 cents a share, reversing a year-ago loss of $246 million, or 38 cents a share. Operating revenue totaled $1.21 billion, up from $1.17 billion last year. Results beat the Thomson First Call consensus for EPS of 18 cents on revenue of $1.17 billion. Still, El Paso was lower by 81 cents, or 5.2%, to close at $14.76.

Hansen Natural(HANS - Cramer's Take - Stockpickr) posted second-quarter earnings of $28.2 million, or 28 cents a share, nearly doubling year-ago results. However, the beverage maker reported revenue of $156 million for the quarter, falling short of estimates. Shares plummeted $10.40, or 25.8%, to $29.85.

Apple Computer(AAPL - Cramer's Take - Stockpickr) finished lower after its 2006 World Wide Developers Conference began. The company demoed its new OS X Leopard operating system during the conference, which is set to compete head-to-head with Microsoft's(MSFT - Cramer's Take - Stockpickr) long-delayed Vista operating system, and introduced new Mac Pro computers with Intel(INTC - Cramer's Take - Stockpickr) chips.

Even so, the company's stock-option woes remain the focus for many investors. The Wall Street Journal reported that several option grants given to executives were dated just before big increases in Apple's stock between 1997 and 2001. Apple shares closed down $1.09, or 1.6%, to $67.21.

Meanwhile, Prudential cut its earnings and revenue estimates for Intel on the belief that demand for the company's Core 2 Duo chip will be lighter than expected. The firm now expects Intel to have full-year earnings of 75 cents, down from a previous forecast of 81 cents. Prudential dropped its revenue target to $36.13 billion from $37.11 billion. Intel gave back 17 cents, or 1%, to $17.32.

The Philadelphia Semiconductor Sector Index was lower by 0.6% for the session following Intel's loss.

In other research moves, JPMorgan Chase downgraded Occidental Petroleum(OXY - Cramer's Take - Stockpickr) to neutral from overweight, citing the stock's valuation. On Friday, the oil company posted second-quarter earnings and revenue that came in below analysts' estimates. However, after crude's spike in price, Occidental was higher by $2.05, or 2%, to close at $107.29.

Elsewhere, Banc of America cut its price target on chip-equipment maker Applied Materials (AMAT - Cramer's Take - Stockpickr) to $16.50 from $18.90. Applied lost 10 cents, or 0.7%, to finish at $15.40.

Overseas markets were mostly lower, with London's FTSE 100 down 1% to 5828 and Germany's Xetra DAX off 1.7% to 5626. In Asia, Japan's Nikkei dropped 2.2% overnight to 15,154, and Hong Kong's Hang Seng edged up 0.4% to 16,953.

The earnings parade picks up again Tuesday with reports expected from Cisco(CSCO - Cramer's Take - Stockpickr), News Corp.(NWS - Cramer's Take - Stockpickr) and Sara Lee(SLE - Cramer's Take - Stockpickr), among others.