Stocks rally as oil slumps

Wall Street breathes a sigh of relief that devastation in Gulf Coast is not even worse. The dollar rallies.

Stocks rallied Tuesday morning as investors breathed a sigh of relief that the damage from Hurricane Gustav was not as devastating as had been feared, and oil prices slumped in tandem.

A rising U.S. dollar helped add to the early stock advance.

The Dow Jones industrial average (INDU) surged more than 200 points or nearly 2% in the early going. The broader Standard & Poor's 500 (SPX) index gained 1.4%, while the Nasdaq composite (COMP) rose 1.7%.


Stocks slumped Friday at the end of an otherwise upbeat August as investors eyed Dell's earnings miss and geared up for Gustav's approach amid a long holiday weekend. All financial markets were closed Monday for Labor Day.

Stocks slumped more than $7 a barrel Tuesday morning as investors bet that the damage from Gustav was not as bad as had been feared. Prices also dropped due to the stronger dollar, which makes dollar-traded commodities cheaper for overseas investors. Additionally, investors continued to bet that global demand for oil is waning.

Gustav and fuel prices: U.S. oil for October delivery fell $7.58 to $107.88 a barre on the New York Mercantile Exchange Tuesday, a nearly five-month low. Prices had plunged over $10 a barrel earlier, before easing up a bit.

The NYMEX was closed for Labor Day, but prices settled up $1.24 to $116.70 a barrel in a special session on Sunday.

Prices had been rising steadily over the last few weeks after tumbling more than 20% off the record high of $147.20 a barrel hit on July 11.

The threat of Gustav had driven prices higher last week as investors tried to assess the impact it might have on the Gulf Coast. Facilities in the area are responsible for roughly 25% of U.S. oil production and a disruption would drive up already high fuel costs.

Gustav hit land as a Category 2 hurricane Monday, but has since been downgraded to a tropical depression. The hurricane forced the evacuation of almost two million residents on coastal Louisiana and could yield property damage of $6 billion to $10 billion, according to risk modeling firm Eqecat Inc. Although this is staggering, it pales in comparison to that of Hurricane Katrina in 2005, which cost $41.1 billion in property damage alone. (Full story).

So far, gas prices have shown little reaction to Gustav. However, analysts say that may change in the weeks ahead as the damage to facilities are better understood.

Gas prices are down nearly 11% from all-time highs hit in mid-July, but remain 33% above last summer's levels.