A crash in oil prices unleashed by the coronavirus lockdown hammered global stocks on Tuesday and opened another battlefront for economies already exhausted by the pandemic.
A world oil oversupply sent U.S. crude prices on Monday so low that sellers holding oil contracts paid buyers up to $30 per barrel to take the oil off their hands. The oil collapse went international on Tuesday, collapsing futures prices for global benchmark Brent crude to a fraction of the $50 or so needed for a producer to make money. The single-digit prices for U.S. crude is a sign that oil markets and the world’s economy may not stabilize for months.
“The supply-and-demand balance for oil is so out of whack that global demand cannot grow fast enough and suppliers can’t cut supply quickly enough to put things back in order,” said Frank Verrastro of the Center for Strategic and International Studies. “There is so much oil sloshing around the world and so few people using it that there is no remedy. Even President’s Trump toolbox looks bare.”
Stocks plunged Tuesday for the second day in a row, with the Dow Jones industrial average falling 631 points, or 2.7%. The broader Standard & Poor’s 500 dropped 86 points, or 3%, while the tech-heavy Nasdaq plunged nearly 300 points, or 3.5%. All three indexes had pared back even deeper losses. European and Asian markets also were in decline as uncertainty gripped investors, who are hungry for any sign of relief from the economic stranglehold of the coronavirus pandemic.
IBM, Apple, Intel and Microsoft were among the big drags on the Dow. All 11 S&P 500 stock sectors were negative.
“The collapse in oil drives home the stark drop in economic activity around the world due to this virus,” said John Kilduff of Again Capital. “That puts a fine point on what we are staring down here.”
Analysts said nearly 40 million Saudi Arabian barrels are on their way to U.S. shores, adding to the tens of millions already in storage here. That delivery “is probably going to be the final dagger in the heart of the U.S. shale oil industry,” said Kilduff, adding that the Saudis need to cut production immediately.
The oil surplus is so pervasive that there producers are storing the vital commodity in giant tanker ships that are roaming oceans, looking for a place to unload. An estimated 10% of the world’s oil tankers are currently being used for oil storage, according to the Wall Street Journal.
President Donald Trump said the administration would move swiftly to shore up the industry.
“We will never let the great U.S. Oil & Gas Industry down,” he said in a Twitter post. “I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”
The oil crisis arrived as U.S. companies already are dealing with one of the most challenging environments in their history. Companies have begun a critical earnings season that will test how employers are weathering the economic lockdown and what their outlook is for the remainder of the year.
Dow component Coca-Cola gave some clues of what is coming; the beverage giant, reporting before the start of trading Tuesday, said it saw a big drop in worldwide sales in April as restaurants, ballparks, movie theaters and other live entertainment have closed. Still, first-quarter results beat expectations. And though the company anticipates a tough second quarter, it expects a pickup in the latter half of the year.
“The ultimate impact on the second quarter and full year 2020 is unknown at this time, as it will depend heavily on the duration of social distancing and shelter-in-place mandates, as well as the substance and pace of macroeconomic recovery,” Coke said in a news release.
Phillip Morris also reported a strong first quarter, but chief executive André Calantzopoulos cautioned, “We expect that the pandemic will have adverse impacts on our full-year 2020 business results.”
Stocks had entered Monday riding a two-week bounce on optimism over reports of promising scientific advances against the coronavirus and on gradual movements by national and state governments to begin easing lockdown curbs. The S&P 500 jumped 15% in the two-week span.
The stock advances began to evaporate as Monday’s oil sell-off spread across the globe. Sellers holding contracts were paying would-be buyers to take the oil off their hands, an unprecedented move that rippled through global oil and currency markets. With many businesses shuttered by public health orders and travel almost totally scrapped due to the coronavirus outbreak, crude inventories far outpace demand and have overwhelmed storage capacity.
Tuesday’s drop saw a big pullback in technology. Microsoft, Amazon, Google-parent Alphabet, Facebook and Netflix went negative. Most of those companies have been the favorites during the last several weeks. (Amazon founder Jeff Bezos owns The Washington Post.)
Ed Yardeni, president of Yardeni Research, said Tuesday’s stock sell-off was partly due to the dive in oil prices and partly due to profit-taking from some investors who saw opportunity after the two-week run-up in stocks.
“It’s unnerving to see negative oil prices, and let’s not forget the market has had a heck of a rally in recent weeks,” Yardeni said. “There is going to be some profit-taking by people who are seeing this as an opportunity to sell.”
May contracts for WTI were about to expire, forcing holders on the contracts to unload their oil at a loss. June WTI contracts, which account for future oil deliveries, were faring a bit better, selling at around $16. That remains far below the break-even mark for companies and most oil producing countries.
Most oil producers need an oil price at least in the $50 to $60 per barrel range, which allows them to make a profit. Oil prices have collapsed this year, with WTI dropping more than 100% based on Monday’s market.
(c) 2020, The Washington Post · Thomas Heath ·
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