By William Watts, MarketWatch
Oil prices plunged Monday as Saudi Arabia and Russia prepared for a global price war, triggering a world-wide equity rout that saw the Dow Jones Industrial Average drop more than 2,000 points at its low, as shock waves traveled through financial markets already shaken by the spread of the coronavirus.
While falling crude prices, which mean lower gasoline prices for consumers, sound like they could be a balm during a period of economic stress, analysts and investors said the combination of sharply declining oil prices combined with existing fears over the economic implications of the coronavirus only heightened uncertainty and fear.
“The coronavirus presents investors with an unprecedented global problem. Investors are uncertain about the nature of the virus, its potential economic impact and the policy response. The oil shock has only added to this confusion and uncertainty,” said Paul O’Connor, head of the multiasset team at Janus Henderson Investors, in a note.
“One thing we do know, however, is that markets are now in panic mode,” he said.
Here’s a deeper look at what’s happening and some of the ways the crude-price fall is rippling through the financial system.
What happened to oil?
Oil futures fell sharply, with the U.S. benchmark, April West Texas Intermediate crude /zigman2/quotes/211629951/delayed CL.1 +0.38% , falling 24.6% to end at $31.13 a barrel. May Brent, the global benchmark, dropped 24.1% to settle at $34.36 a barrel. Both grades traded at their lowest levels since early 2016 and suffered their biggest one-day percentage drops since the 1991 Gulf War.
Why is falling oil a problem for stocks?
U.S. stocks plunged at the opening bell, with trading briefly halted as a 7% intraday slide for the S&P /zigman2/quotes/210599714/realtime SPX -0.24% triggered a so-called circuit breaker. Stocks remained sharply lower throughout the session, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.10% dropping 2,013.76 points, or 7.8%. The S&P 500 tumbled 7.6%. Major indexes ended the day near the threshold that would mark the start of a bear market.
Oil accounts for more than 3% of the S&P 500, and banks are also exposed to the sector via loans. Meanwhile, pressure on yields tied to the collapse in oil prices is also bad news for financial stocks, analysts said.
The breakdown in oil prices also adds to fears of a global recession. And, with the U.S. now a net exporter and the world’s largest oil producer, falls in price, while offering some benefit to consumers, aren’t an unalloyed positive and may even be a net drag, economists have argued.
“Markets are trying to force a policy response — from central banks and from Washington, D.C. A basket of more aggressive monetary-policy action is coming, and how markets respond is the big question. The market will get something resembling ‘zero bound’ very soon, but that is not likely to be effective,” said David Bahnsen, chief investment officer at the Bahnsen Group, in a note.