- The Dow Jones started the week with a painful nosedive.
- An epic collapse in the price of May’s WTI crude futures contract saw front-month oil prices go profoundly negative.
- With a wave of job losses likely, the Dow has another big problem on its hands.
The Dow Jones nosedived on Monday as the impact of the coronavirus lockdown on crude prices caused the front-month WTI futures contract to collapse below zero and plummet as low as negative $40 per barrel ahead of expiration.
With an armada of Saudi Arabian oil on its way to the U.S., the situation is getting worse. Negative prices in North America and inevitable layoffs create another threat for a Dow that has been struggling toward a recovery.
Historic Crude Demolition Batters the Dow Jones
All three of the major U.S. stock market indices fell to start the week:
- The Dow plunged 545.58 points or 2.25% to 23,696.91.
- The S&P 500 fell 1.59% to 2,828.94.
- The Nasdaq dipped 0.76% to 8,583.71.
Stocks may be pulling back from their recent recovery, but the price of oil was the big talking point on Wall Street today as expiring U.S. crude futures careened into negative territory.
With analysts and strategists scrambling to find a reason for the vast sell-off, it is apparent that something structural is afoot. A massive long-squeeze coupled with scarce storage capacity led traders and funds to dump May’s expiring oil futures at any price.
Front-month WTI crude futures fell as low as negative $40.32 before recovering to negative $35.39 for a daily loss of 293%.
All was not well in the June contract either, which fell 12% but held above $22 bbl.
The impact of falling oil demand on the U.S. economy is evident. Job losses are already rampant in the energy sector, and these will continue until the supply-demand curve stabilizes.
A whopping 11% drop in the rig count last week is strong evidence of this, and when you combine that with the services industry carnage, the headwinds for the Dow Jones increase once again.
Joshua Mahony, a senior market analyst at IG, notes that the pressure on prices is the direct result of inventory piling up around the world – but especially in North America.
He writes that this is “unlikely to go away anytime soon”:
Oil prices have hit a 20-year low this morning, with a clear distinction between US crude and Brent crude forming as stockpiles fill up. With a huge surplus in crude products filling inventories on land, there is a clear benefit to those producers whom are able to put their oil out to sea.
Unfortunately, the lack of demand and landlocked nature of production in the US and Canada has already started to provide negative prices across a number of crude products in North America. With the insufficient OPEC+ production cut of 9.7m bpd only kicking in at the start of May, the huge oversupply issue looks unlikely to go away anytime soon.
Part of the problem for the market’s oversupply issue is that a colossal wave of Saudi Arabian oil is heading to North America. In response to this, Canadian Edmonton Mixed Sweet crude fell slightly below zero, highlighting how desperately short inventory space is getting throughout the continent.
The fact that the U.S. and Europe are gradually plotting their exit from the coronavirus shutdown does not appear to be changing the near-term demand outlook. Air travel is miles away from normalcy, even after travel restrictions are eventually reduced.
Given that the United States is the largest oil producer in the world, the impact on the U.S. stock market has been markedly subdued.
But Wall Street cannot ignore the fact that the jobless claims will continue to spike as rigs go offline.
Dow Stocks: Big Oil Struggles, Boeing Whalloped After China Cancellations
The Dow 30 could not ignore the devastation in the oil market, and major energy companies Exxon Mobil (-4.7%) and Chevron (-4.2%) took steep haircuts amid the chaos. While these industry titans both have an opportunity to consolidate power amid an impending wave of bankruptcies, there is no doubt that their dividends are at risk.
Boeing was another dead weight on the Dow Jones, falling 7% because its sacred order book has seen mounting cancellations from Chinese clients.
The grounding of the 737 MAX, as well as the capitulation of the global airline industry, are twin crises for the aerospace manufacturer. But it is not all bad news for the thousands of Boeing employees who head back to work this week in Washington.
Apple stock fell a relatively benign 1.6%. The tech sector as a whole continues to be a pillar of strength for the stock market during the pandemic.
Last modified: September 23, 2020 1:50 PM