Dow still slumps; oil to blame

Staff/wire report

YOUNGSTOWN

Wall Street is drowning in oil.

U.S. stocks slumped Wednesday as the price of oil suffered its worst one-day drop since September.

A huge sell-off earlier in the day pushed the Standard & Poor’s 500

index to its lowest level in almost two years.

Investors are worried low oil prices mean there’s not that much demand for fuel. That would be a sign that growth in the global economy is slowing down.

Stocks in the U.S. started sharply lower, after widespread selling overseas, and at one point the Dow Jones industrial average fell as much as

565 points.

After a late recovery, the Dow closed down 249.28 points, or 1.6 percent, to 15,766.74. The S&P 500 index fell 22 points, or 1.2 percent, to 1,859.33. The Nasdaq composite, which briefly turned positive in the afternoon, lost 5.26 points, or 0.1 percent, to 4,471.69.

U.S. crude dropped $1.91, or 6.7 percent, to $26.55 a barrel in New York. That was the biggest one-day plunge for U.S. oil since Sept. 1.

U.S. crude is down 28 percent so far this year and is trading at its lowest level since May 2003.

Brent crude, a benchmark for international oils, fell 88 cents, or 3.1 percent, to $27.88 a barrel in London.

Stocks are having their worst start to a year in history in part because of a rapid plunge in the price of oil. The drop has dragged down energy company shares in the Standard & Poor’s 500 index by 13 percent, which has helped pull the overall index down 9 percent. This even though low oil prices – and the cheap prices for gasoline and other fuels that result – are wonderful for consumers and many companies.

“It seems ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we’re worried about them being too low,” said Julian Jessop, head of commodities research with London-based researchers Capital Economics Ltd.

The drastic drop in oil and stock prices stands in contrast with a U.S. economy that, on the whole, is doing pretty well. U.S employers created 292,000 jobs in December, and few economists see the economy sliding into recession.

George Mokrzan, director of economics for Huntington Bank, noted the “pretty consistent job growth” and the payroll growth in the nation.

“It may not be a lightning-growing economy, but it is a steadily growing economy,” Mokrzan said. “The vulnerability of the economy becomes worse if you have a lot of weak statistics.”

Cleveland-based economist George Zeller explained that the low price of oil increases the value of the dollar and that has impacted the nation’s exports.

“When the dollar is increasing, the prices of our exports increase and makes it harder to sell,” Zeller explained. “Meanwhile, we are buying imports at a bargain.”

Zeller does not have a forecast of what could happen with the price of oil and its impact on the economy. “This is certainly a cause for serious concern because if this keeps up, we are going to go back to a recession,” Zeller said.

Zeller explained that the recession would be caused by a large decline in wealth from the decline in the equity values, which would then show up in consumer confidence. “This is certain to have negative effects,” he said. “The question is how negative will they will be.”

COST OF OIL

The price of oil is so low because there is so much of it.

A long run of high oil prices inspired drillers to develop new techniques and to go to new places to find more oil, and they succeeded. In the U.S. improved oil-drilling technologies known generally as fracking have added more oil to the global market than the total production of any other nation in OPEC other than Saudi Arabia.

Producers in the U.S. and abroad haven’t cut back production very much, despite the low prices, and now the lifting of international sanctions against Iran could send more oil flowing into markets that are already awash in crude.

U.S. stockpiles are at their highest level in at least 80 years, and the International Energy Agency predicts that during the first half of this year, global oil supply could outstrip demand by 1.5 million barrels per day.

OIL PRICES AND

THE STOCK MARKET

Oil-company profits are plummeting, so oil-company shares are plummeting, and that is dragging down the whole market.

Two of the biggest oil companies in the world, Exxon and Chevron, are part of the 30-member Dow Jones industrial average. Of the 20 biggest share-price losers in the S&P 500 this year, 13 are energy companies.

Investors are also selling shares of companies that may have exposure to the oil industry, such as certain banks. And the price of oil has now fallen so low that investors are also worried it could mean global economic growth is much weaker than expected, which could hurt all companies.

Tom Picino, managing partner at Poland-based Diamante Capital Partners, a private investment firm, says “the average consumer investing in their 401k shouldn’t be paying attention unless they are within five years of retirement.”

“If you under the age of 55 or 60, you should stay the course with diversified investments,” Picino said.

LOWER OIL PRICES: are they

GOOD FOR THE ECONOMY?

It depends on why oil prices are lower to say if it is good for the economy.

If they fall because new supplies have been found, it usually helps the broader economy, and markets held up fairly well during oil’s big slide from more than $100 a barrel in 2014 to under $50 a barrel last year.

But this latest plunge in prices to under $30 a barrel has investors worried that oil prices are falling because global growth is slowing, as businesses and consumers in many developing countries, particularly China, cut back on spending.

Bruce Kasman, chief economist at JPMorgan Chase, says that steep drops in oil prices have historically been a sign of a weakening global economy.

Kasman estimates that U.S. spending grew at a tepid pace of just 1.5 percent in the final three months of last year.

“There’s no doubt that the consumer spending growth figures for the U.S., Europe and Japan have disappointed,” he said.

Some of that likely reflected a temporary drag from warm weather, as Americans spent less on winter clothing and utilities. That could turn around in the first quarter, giving the economy a lift, Kasman said.

Delta Air Lines told investors this week that bookings for this spring are ahead of last year’s pace because cheaper gasoline means consumers have more money.

Contributor: Kalea Hall, staff writer