Oil Fall Continues, Stock Market Rout Deepens


Stock selloff has reached panic levels as oil falls below the psychologically critical level of $30/barrel.  WTI futures fell below $30 for contracts expiring in February briefly on Wednesday, before ending the day slightly above at $30.58. The decline was prompted by news that Iran will add 500,000 barrels a day of exports within a week of the removal of sanctions against the country.

Additionally, the Energy Information Administration announced that U.S. crude inventories rose 234,000 barrels to 482.6 million last week, while crude output rose 8,000 barrels a day to 9.23 million. Analysts call the data "ugly" for both commodity and inflation bulls, noting that demand cannot meet the continued growth in supply. Additionally, gasoline stockpiles continue to climb, with 8.4 million barrels more of gas on hand bringing the total cache to 240 million barrels. That is the highest stockpile in almost a year.

In many parts of the country, gas prices have fallen to less than $2.00 per gallon, and analysts expect even lower gas prices could wait on the horizon.

A Boom for Consumers?

While the increase in oil supply, lower energy costs, and greater availability of energy would traditionally be seen as tailwinds for U.S. consumer spending, investors in the stock market are not interested in betting on a more robust and monetarily empowered American citizenry using their purchasing power to consume goods and services.

Instead, the fall in oil prices has helped exacerbate a stock sell-off that has made January already a poor performer for all American indices. The Dow Jones Industrial Average fell 2.21 percent on Wednesday after a strong early start to the day, bringing the index down about 6.6 percent already for 2016. The broader S&P 500 index fell almost as much in the same period, and both indices are headed for a bear market if the trend does not reverse.

Technology stocks have been hit even harder, with the Nasdaq Composite down 8.2 percent year-to-date, and 13.5 percent off their 52 week high.

Analysts remain broadly stumped at the trend, since technology, stocks have historically no correlation to oil prices, and in theory, cheaper energy should make information technology capital expenditures lower as fuel costs fall. Nonetheless, expectations for both revenues and earnings for many tech companies are falling alongside the price of oil.

Corporate debt is also falling, causing borrowing costs for large firms to rise. The trend is partly a result of a fear of contagion--as oil gets too cheap for energy companies to drill out of the ground profitably; they will be forced to declare bankruptcy. As that happens, debt holders will lose both principal and interest payments, causing greater economic malaise. Meanwhile, companies dependent on the energy sector will also see a fall in revenues, and oil field workers will lose their jobs as a result.

Already, General Electric announced plans to cut over 6,000 jobs in its energy divisions, and some analysts have given up on covering energy stocks entirely due to the volatility of the sector.