Falling Oil Prices Disrupt the Financial Markets

A sharp drop in oil prices ended the S&P 500's record-breaking rally.

Lawmakers, business leaders and healthcare professionals around the country are searching for solutions to curtail the spread of COVID-19 and reopen the U.S. economy.

A sharp drop in the price of oil disrupted the financial markets this week, ending a record rally for equities. After the S&P 500 had its best 18-day performance since 1933, it’s not surprising to see the market digest those gains, Chief Investment Officer Larry Adam said.

“Equity markets do not move in a straight, uninterrupted line, especially in an environment predicated on headline news flow,” Adam said. “Continued uncertainty surrounding the timeline for the reduction of social distancing measures and the reopening of the economy, combined with an unprecedented decline in oil prices, led to an uptick in volatility.”

Oil prices dropped precipitously because supply greatly exceeds demand at a time when travel is diminished and much of the world’s population is staying home to help curtail the spread of the virus. The price of West Texas Intermediate (WTI) crude oil – considered the benchmark for the price of oil in the United States – briefly went into negative territory.

“The cause of this highly bizarre situation is a physical lack of storage,” said Energy Analyst Pavel Molchanov. “Storage tanks around the world are becoming saturated.”

The problem is especially severe at a storage hub in Oklahoma, where the WTI price is set. For now, Molchanov suggests the Brent price – considered the global benchmark – is a better reflection of oil industry fundamentals. The Brent price has come down, too, but is less affected by conditions at any single facility.

It’s a strange reality to see oil prices so low at a time when many of us have nowhere to go.

“In past decades, lower oil prices were beneficial to the economy,” Chief Economist Scott Brown said. “Spending less to fill their gas tanks meant consumers had more money to spend on other things. But now we see big hits in energy jobs and capital spending when oil prices fall.”