UPDATE: Wall Street sinks as price of oil drops to historic low

U.S. stocks sank sharply Monday as oil prices collapsed and fell below $0 for the first time in history.

The Dow Jones Industrial Average dropped nearly 600 points, and the plunge in oil sent energy stocks in the S&P 500 to a 3.7% loss, the latest in a dismal 2020 that has caused their prices to nearly halve.

Treasury yields also dropped on Wall Street, but the market’s most dramatic action by far was in oil, where the cost to have a barrel of U.S. crude delivered in May plummeted to negative $37.63. It was at roughly $60 at the start of the year.

The Dow lost 592.05 points, or 2.4%, to 23,650.44.

The Nasdaq Composite Index dropped 89.41, or 1%, to 8,560.73.

The S&P 500 fell 51.40 points to 2,823.16.

The losses ate into some of the big gains indexes have made since late March, driven lately by investors anticipating the potential reopening of businesses as infections level off in hard-hit areas. Pessimists have called the rally overdone, pointing to the severe economic pain sweeping the world and continued uncertainty about how long it will last.

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“The government can declare whatever they want in terms of encouraging people to get out and do stuff,” said Willie Delwiche, investment strategist at Baird. “Whether or not broad swaths of society do that remains to be seen. It’s going to take seeing people start to get out and do stuff again. That will be the necessary positive development, not just declaring getting things open.”

More gains from companies that are winners in the new stay-at-home economy helped limit the market’s losses. Netflix jumped 3.4% to set another record as people shut in at home look to fill their time. Amazon added 0.8%.

In a sign of continued caution in the market, Treasury yields remained extremely low. The yield on the 10-year Treasury slipped to 0.62% from 0.65% late Friday.

What it means

Stocks have been on a general upward swing recently, and the S&P 500 just closed out its first back-to-back weekly gain since the market began selling off in February. Promises of massive aid for the economy and markets by the Federal Reserve and U.S. government ignited the rally, which sent the S&P 500 up as much as 28.5% from a low on March 23.

More recently, countries around the world have tentatively eased up on business-shutdown restrictions put in place to slow the spread of the virus.

But health experts warn the pandemic is far from over and new flareups could ignite if governments rush to allow ”normal” life to return prematurely. The S&P 500 remains nearly 17% below its record high as millions more U.S. workers file for unemployment every week amid the shutdowns.

Many analysts also warn that some of the the recent rally for stocks is due to expectations the economy will pivot quickly and rebound sharply once economic quarantines are lifted. Those could prove to be too optimistic.

“There’s still uncertainty surrounding the reopening of the economy,” said Julian Emanuel, chief equity and derivatives strategist at BTIG. “Come fall, are we going to be back on airplanes? Are we going to go out and eat?”

Earlier in the day

Stocks were down from the start Monday as momentum from last week’s rally faded and oil prices tumbled to historic lows.

The S&P 500 was down 1% after the first 15 minutes of trading, ahead of a busy week where dozens of CEOs at the biggest U.S. companies are scheduled to show investors how badly the coronavirus outbreak hit their profits in the first three months of the year.

The latest on oil

That pain is perhaps most prevalent in the oil industry, where idled factories and automobiles around the world have forced demand for energy to collapse.

Traders are still paying $20.43 for a barrel of U.S. oil to be delivered in June, which analysts consider to be closer to the “true” price of oil. Crude to be delivered next month, meanwhile, is running up against a stark problem: traders are running out of places to keep it, with storage tanks close to full amid a collapse in demand as factories, automobiles and airplanes sit idled around the world.

Tanks at a key energy hub in Oklahoma could hit their limits within three weeks, according to Chris Midgley, head of analytics at S&P Global Platts. Because of that, traders are willing to pay others to take that oil for delivery in May off their hands, so long as they also take the burden of figuring out where to keep it.

“Almost by definition, crude oil has never fallen more than 100%, which is what happened today,” said Dave Ernsberger, global head of pricing and market insight at S&P Global Platts.

“I don’t think any of us can really believe what we saw today,” he said. “This kind of rewrites the economics of oil trading.”

Other signs

Also exacerbating the volatility is that few traders are buying and selling U.S. oil to be delivered in May. They won’t even have the opportunity to do so after Tuesday, when trading contracts for it expire and the earliest delivery they’ll be able to buy is for June.

Brent crude, the international standard, fell nearly 9% to $25.57 per barrel.

Among them was Halliburton, which fell more than 5% even though it reported stronger profit and revenue for the first three months of 2020 than analysts expected. The oilfield services provider said that the pandemic has created so much turmoil in the industry that it “cannot reasonably estimate” how long the hit will last. It expects a further decline in revenue and profitability for the rest of 2020, particularly in North America.

Brent crude, the international standard, was down $1.38, or 4.9%, to $26.70 per barrel. Big oil-producing countries have agreed to cut production to help balance supplies with demand, but many analysts say the cuts are not sharp enough to lift prices.

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“Basically, bears are out for blood,” analyst Naeem Aslam of Avatrade said in a report. “The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut."

Economic data continues to show heavy damage to growth. Investors braced for a busy week when dozens of CEOs from the largest companies are scheduled to give updates on how bad the pandemic is hurting them.

U.S. Treasury yields remained extremely low. The yield on the 10-year Treasury slipped to 0.63% from 0.64%. It started the year near 1.90%. Bond yields drop when their prices rise, and investors tend to buy Treasurys when they’re worried about the economy.

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The most recent gains have been powered by hopes that the pandemic may be leveling off in some of the world’s hardest-hit areas.

But the S&P 500 is still down roughly 16% from its record high in February. Some 22 million U.S. workers have lost their jobs in the last month as businesses shut down. Banks are bracing for consumers and businesses to default on billions of dollars in loans, and no one can say for sure when the economy will get back to anything approximating “normal.”

Stocks in Europe

Stocks in Europe turned lower despite the fact that some countries eased their lockdowns on business.

A fresh crop of grim economic data is also expected this week and is likely to further illustrate the damage done to the world economy as governments look hopefully for a date to end their lockdowns.

The DAX index in Germany, where some business activity was starting to resume, shed 1.2% to 10,500 while Britain's FTSE 100 fell 1% to 5,728. In France, the CAC 40 declined 1.2% to 4,445.

Asian markets

Japan reported Monday that its exports fell nearly 12% in March from a year earlier as the pandemic hammered demand in its two biggest markets, the U.S. and China. Tokyo's Nikkei 225 index gave up 1.2% to 19,669.12.

The Hang Seng index in Hong Kong lost 0.2% to 24,330.02, while the Shanghai Composite index added 0.5% to 2,852.55. The Sensex, in India, added 0.2% to 31,665.69.

The S&P/ASX 200 declined 2.5% to 5,353.00 as Australian resource companies were pulled lower by the weakness in oil prices.

A decline in China’s benchmark lending rate, which mostly affects big, state-owned companies, helped support Shanghai’s Composite index. The People’s Bank of China paved the way for the monetary easing last week by reducing by 0.2% a rate called the medium term lending facility, which forms the basis for the loan prime rate. The cuts reduce short-term borrowing costs for banks.

China’s central bank has used various targeted moves to ease the crunch from the pandemic, which resulted in a 6.8% contraction in the economy in the last quarter. “As employment conditions remain weak and external demand is being held back by lockdowns elsewhere in the world, we think the People’s Bank will take further steps to prop up activity,” economists at Capital Economics said in a commentary.

The dollar fetched 107.79 Japanese yen, up from 107.54 yen on Friday. The euro weakened to $1.0859 from $1.0875.

— Compiled by ArLuther Lee for The Atlanta Journal-Constitution