Increasing supply of oil in the world market is causing a glut of oil, adversely affecting the financial markets Friday. The situation pushed the stock prices further down suffering the worst weekly loss they had in about two and a half years.
With investors worrying about the declining demand for oil, the stock market dropped sharply. This made it appear that the United States is weaker than it really was. Although the transport industry and the consumers may benefit from cheaper oil prices, big energy companies and utilities expect their revenues to go down.
When Iraq announced that it has achieved a record-breaking oil output when there is already an oil glut in the world market, the price of crude oil dropped approximately 6.7 percent. This wiped out the price gains from the big day rallies the stock market experienced last Friday.
"Right now, you could track the direction of stocks when you see where oil is trading," says Brian Jacobsen, Wells Fargo Funds Management Chief Portfolio Strategist.
The Nasdaq composite fell 1.2 percent, or 54.57 points, to 4,653.60 while the Dow Jones industrial average fell 1.8 percent or 315.51 points, to 17,280.33.
The index of Standard&Poor's dropped 1.6 percent or 33 points, to 2,002.33. Its drop is 3.5 percent for the week which is its biggest fall since May 2012.
On Friday, the U.S. oil benchmark fell 3.6 percent or $2.14, to $57.81 per barrel. Energy stocks included in the Standard&Poor's 500 index also dropped 2.1 percent suffering a loss of 16.5 percent for the year.
"In a nation like the U.S. (as well as) Europe and most of Asia, the benefits of falling oil outweigh the costs," said Jeff Kleintop, chief global investment strategist of Schwab's. "The concern is that there's something more to it, given such a sharp decline, that there's something deeper here," he added.