The markets are seeing a steep decline today as broad based commodity dumping surges. The SPDR S&P 500 ETF (NYSE:SPY) is trading at $131.16, -1.30 (-0.98%). Oil is leading the decline for a second straight day as spot crude has fallen from $113 a barrel two days ago to its current level at $106.00. This massive drop has sent the indexes tumbling mainly because of their heavy weighting in energy stocks. A great example would be Chevron Corporation (NYSE:CVX). This stock is one of the thirty stocks in the Dow Jones Industrial Average along with Exxon Mobil Corporation (NYSE:XOM). The S&P 500 is also heavily weighted towards energy stocks. When these stocks take a major hit, the indexes will take a major hit as well. Today, Chevron is trading at $103.88, -3.90 (-3.62%).
Energy is taking a massive hit for multiple reasons. Yesterday, it was reported that Goldman Sachs Group, Inc. (NYSE:GS) sent an alert to its clients to sell oil and other commodities. It was reported that Goldman Sachs advised their clients that the risk to reward in oil was no longer as attractive in the short term due to the major run higher. This began the sell off which has continued into today.
In addition, the nuclear disaster in Japan was upgraded to a level 7. This puts it on par with Chernobyl. As this disaster looks to be worse, demand for oil from Japan may crumble as their economy takes a bigger hit.
Lastly, the quick spike in oil is much like an oil shock to consumers in the United States and abroad. Demand destruction looks to be in play. Demand destruction occurs when the price of oil jumps, shocking the consumer. The consumer compensates by cutting energy use. When energy use declines, supplies surge and ultimately prices will fall.
These three factors have come together to drop oil drastically in the last two days. Speculators that jumped on the oil bandwagon are also selling quickly which is helping the oil drop as well.