Oil's Worst Week in a Year Sends Markets in Tailspin

U.S. equity markets were sharply lower Friday as they looked to cap off a week of volatility sparked by uncertainty in the oil market.

The Dow Jones Industrial Average was down 309 points lower, or 1.76% to 17265. The S&P 500 dropped 39 points, or 1.95% to 2019, while the Nasdaq Composite shed 111 points, or 2.21% to 4933.

The announced merger between DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW) weighed heavily on the materials sector, while crude supply concerns forced energy into steep declines.

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Wall Street’s major averages saw substantial weekly declines as the Dow and S&P 500 dropped more than 3%, while the Nasdaq shed 4%.

The moves come after, the International Energy Agency warned the global supply glut that forced oil prices to seven-year lows, could get worse in 2016. In a monthly report, the EIA said OPEC’s decision a week ago to keep crude production at current levels would increasingly hurt non-OPEC oil producers, including U.S. shale companies.

Following the news, West Texas Intermediate crude prices dropped 4.35% to settle at $35.62 a barrel. That was its biggest weekly decline in a year since a 12.2% plunge last December. Meanwhile, Brent, the international benchmark, shed 5.07% to $37.93 a barrel, hitting a new 52-week low and the biggest percentage declines since November 2014.

Rick Allen, director of Platts Bentek oil and gas consulting services, said last Friday’s decision by OPEC appears to be an effort by Saudi Arabia to protect its global market share, and there are few signs the nation will change its strategy.

“It’s hard to imagine they’d be the ones to cut [production],” Allen said. “It will probably have to be a non-OPEC producer forced to cut capex. The signal coming from the Saudis is that it won’t be them, and they probably don’t want to do that to make room for other barrels to enter the market from Iran and other marginal producers.”

Allen continued by saying while there’s a benefit to consumers from low oil and gas prices, for the U.S. economy as a whole, the effect is muted by the lack of investment in capital projects in the energy sector.

“You see a lot of companies drilling less, laying off parts of their workforces. Some of that capex cut is offsetting or creating muted effects for low fuel price in the economy. That benefit from lower energy prices was expected, and I don’t think it’s been seen,” Allen explained.

Traders in the U.S. got the latest read on the American consumer on Friday with the release of retail sales data from the Commerce Department, which showed prices rose 0.2%, slightly less than the 0.3% expected increase. Excluding auto sales from the equation, prices were up 0.4%, beating expectations for a 0.3% rise.

The University of Michigan’s consumer sentiment gauge, meanwhile, rose to 91.8 in December from a final November reading of 9.13. It was, however, below expectations for an increase to 92 for the month.

The latest reading on producer prices, meanwhile, showed inflation at the wholesale level was up 0.3% last month, beating unchanged expectations. Excluding the volatile food and energy components, prices rose 0.3%, compared to a 0.1% expected increase.

Steve Chiavarone, associate portfolio manager at Federated Investors, said while Friday’s market action was “frustrating,” the data was positive.

“Everyone wants to focus on sales at Macy’s, but the reality is that’s not a full measure of the consumer,” he explained. “Auto sales are at multi-year highs, new and existing home sales are at highs, retail sales were better than expected…those should all be god things, the market is just going through its last stages of a pre rate-hike tantrum.”

As traders prepared to parse Friday’s economic data on Friday, they kept a keen focus on what it would mean in the context of next week’s Federal Open Market Committee meeting.  Central bankers are widely expected to begin hiking short-term interest rates from historic lows at the conclusion of the two-day meeting, raising rates by 0.25%.

In recent action, the yield on the benchmark 10-year U.S. Treasury bond slipped 0.099 percentage points to 2.139%.

Elsewhere in commodities, gold prices rose 0.56% to $1,078 a troy ounce, while silver declined 1.28% to $13.93 an ounce. Copper gained 2.05% to $2.12 a pound.

Meanwhile, in corporate news, DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW) made things official when the two American chemical giants confirmed their intent to merge into one company called DowDuPont. The all-stock transaction is valued at $130 billion, making it the second-biggest tie-up of the year, behind announced plans from Pfizer (NYSE:PFE) and Allergan (NYSE:AGN).

In an effort to hedge regulator concerns, Dow and DuPont said the plan was to merge their businesses, and then split the combined company into three units focused on agriculture, materials, and specialty products.

Shares of the companies saw steep declines during the session.