Oil’s chaotic collapse deepened, and stocks around the world dropped on Tuesday as the economic carnage caused by the coronavirus pandemic turns markets upside down.
The price of oil has plummeted because very few people are flying or driving, and factories have shut amid widespread stay-at-home orders. Global demand is set to drop this month to levels last seen in the mid 1990s. At the same time, oil producers can’t slow their production fast enough, and all the extra crude going into storage is sending tanks close to their limits.
In the U.S., the cost for a barrel of oil to be delivered in June plunged 43% to $11.57. That’s the part of the market that U.S. oil traders are focused on and trading most actively. For oil to be delivered next month, which is when storage tanks could top out, the cost of a barrel stood at $10.01. A day earlier, it fell below zero for the first time, meaning traders paid others to take the oil off their hands to get rid of the headache of finding someplace to store it.
Analysts consider prices for U.S. oil to be delivered in June and later as closer to the “true“ price of crude, along with prices for international oils. They did not drop below zero, in part because the storage issues aren’t as urgent for them. But they also slid Tuesday on the same concern: A global economy incapacitated by the virus outbreak doesn’t need to burn as much fuel.
Brent crude, the international standard, for delivery in June lost 26.6% to $18.74 per barrel.
“I don’t think there’s enough time even before the June contract to solve the storage capacity issue, so you see the June contract coming down sharply,” said David Joy, chief market strategist at Ameriprise Financial. “I don’t know if that persists into July and beyond, but at the very least, we’re going to be faced even at that time with a dramatic mismatch between supply and demand.”
The Dow Jones Industrial Average fell 606 points, or 2.6%, to 23,047, and the Nasdaq was down 3.2% The losses were widespread, and all 11 sectors that make up the S&P 500 were down.
In another sign of the worry washing over markets, Treasury yields fell further. The yield on the 10-year Treasury dropped to 0.57% from 0.62% late Monday, meaning investors are willing to get paid even less to get the safety of owning a U.S. government bond. At the start of the year, before economies worldwide went on lockdown to slow the spread of the virus, investors were getting paid about 1.90% to own a 10-year Treasury.
Even with all the chaos in the oil markets, some signs of economic activity on the horizon were poking through elsewhere. The Senate’s Democratic leader said negotiators reached agreement on major elements of a nearly $500 billion proposal to provide more loans and aid to small businesses and hospitals. Georgia’s governor, meanwhile, announced plans late Monday to allow gyms, hair salons and other businesses to reopen as early as Friday.
Rising optimism among some investors that parts of the economy could reopen as infections level off have helped stocks rally recently, and the S&P 500 is up more than 20% since hitting a low in late March. The rally got its start after the Federal Reserve and Congress promised massive amounts of aid for the economy.
“It looks like we’re bending the infection curve, there are signs of economic reopening and the stimulus is there,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “All of which are good signs for the markets where there’s a potential scenario where the economy starts to recover.”
But the data coming in on the economy in the here and now continues to be dismal, including a Tuesday report that showed the steepest drop for U.S. sales of previously occupied homes since 2015. Pessimists say the market’s rally has been overdone and that a premature reopening of the economy could lead to only more flareups of infections.
Companies are also describing the hit to earnings they’re taking due to the outbreak, with many pulling their financial forecasts for the year given all the uncertainty about how long this recession will last. Coca-Cola said Tuesday that its sales were on track to hit financial targets through February, but that all changed when stay-at-home orders became widespread in March. It said it’s hopeful that improvement could arrive in the second half of the year. IBM on late Monday withdrew its guidance for 2020 results and said it will reassess at the end of June.
“There’s still a lot of uncertainty about this market,” said Ameriprise Financial’s Joy, “and it’s understandable because the visibility on earnings and the economy even is very limited still.”