Oil was gunning for another record close above $54 a barrel early Monday, hitting stocks on fears crude prices would slow the economy further. The oil rally ignited after the International Energy Agency raised its forecast of world oil demand for 2004 by 0.3%. The report didn't back a bullish outlook, however, and oil finished the day with a loss of 2% to $52.51.

Oil's end-of-the-day decline helped pull the major averages out of their slide and erase most, but not all, of their losses. The

Dow Jones Industrial Average

closed down 0.05% to 10,077.18, aided by a 2.6% jump in component

Johnson & Johnson

(JNJ) - Get Report

, which posted a 13% increase in third-quarter profit and raised its outlook for the year.

The

S&P 500

ended down 0.2% to 1121.84 while the

Nasdaq Composite

lost 0.1% to 1925.17, hurt by a drop in semiconductors ahead of

Intel's

(INTC) - Get Report

postclose earnings report. Intel lost 1.6% to $20.28 during the regular session.

After hours, Intel shares were recently up 59 cents, or 2.9%, to $20.87 despite posting third-quarter earnings a penny

shy of expectations and providing lackluster guidance.

Elsewhere,

Yahoo!

(YHOO)

shares were recently up 38 cents, or 1.1%, to $34.61 after the Internet giant posted

better-than-expected revenue and in-line earnings.

Rethinking the Forecast

Why did oil reverse? Details of the IEA report didn't support the scenario of a further tightening of supplies.

Inside the monthly forecast update, the agency said world production had increased by almost 0.8% in September or more than twice as much as demand increased. And that was after Hurricane Ivan knocked out almost a half-million barrels a day. Once those wells come back on line, supply will be up 1.3%.

Overall, the agency said worldwide production could rise by 17% from October through December. And the demand forecast for 2005 was shaved by 0.1%. As to fears of violence in Nigeria disrupting that country's supplies, the IEA said production has been "unscathed" thus far.

In an aside, the group said demand growth from China was slowing, but not because the Chinese economy has slowed (as mentioned

previously, China doesn't appear to have slowed its economy much at all). Oil demand rose 6% in August after climbing 12% in July and 25% in the second quarter. Why? The slowing "reflected price effects, conservation measures and new non-oil power generation capacity," the agency said.

Oil's decline put highflying oil services companies underwater for a second straight day.

Schlumberger

(SLB) - Get Report

lost 2%,

Halliburton

(HAL) - Get Report

dropped 0.8% and

Baker Hughes

(BHI)

lost 1.6%. Major oil firms fell too, as

Exxon Mobil

(XOM) - Get Report

and

ChevronTexaco

(CVX) - Get Report

each fell 0.8%.

The bond market rallied on higher oil in the morning and then, like a petulant child with a lollypop in hand, refused to give back its gains even after oil retreated. The yield on the Treasury's 10-year note finished at 4.10%, down from 4.13% on Monday.

The decline in yield also helps keep mortgage rates low, which aided recently battered shares of homebuilders. The Philadelphia Exchange's housing stock index gained 0.5% to 388.71. It's still down from 410.72 on Oct. 1.

Another boost came from

M.D.C. Holdings

(MDC) - Get Report

, which reported that its profit was up 61% and revenue rose 28% in the third quarter. The shares gained 7%, aided by a huge post-2 p.m. surge, to $73.05. MDC had lost 9% since competitor

Pulte Homes

(PHM) - Get Report

admitted on Oct. 4 that it was cutting prices amid high cancellations in the red-hot Las Vegas market.

In a forthcoming column, we'll go beyond the headlines, where M.D.C. results look decidedly more hazy.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.