Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market.

And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer.

Indeed, the Dow Jones Industrial Average DJIA, -1.79% already endured a bludgeoning, registering its second-worst weekly loss in 2014, shedding 570 points, or 3.2%, on Friday. That’s just shy of the 579 points that the Dow lost during the week ending Jan. 24, earlier this year. It’s also the second worst week for the S&P 500 this year SPX, -1.62% which was down about 58 points, over the past five trading days, or 2.83%, compared to a cumulative weekly loss of 61.7 points, or 3.14%, during the week concluding Oct. 10.

But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009.

Moreover, the largest energy exchange traded fund, the energy SPDR XLE, -1.86% is off by 14% over the past month and has lost a quarter of its value since mid-June.

The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist.

Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players.

In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak.

It’s important to note that Lascelles believes that the downdraft in oil is largely a positive. The economist also believes that oil sector’s pain will be confined mostly to the energy sector.

“Naturally, there are all sorts of second-round implications extending via the wealth effect from investors owning the stocks and bonds, etc., Lascelles told MarketWatch. “I can see how the hit would be palpable, but don’t forget about the big help that comes from lower gas prices for households and other businesses,” he added.

There are signs that oil production growth is starting to retrench among U.S. shale-oil producers amid the rout in oil. North Dakota state officials on Friday said that oil production shrank by 4,000 barrels a day in October compared to the previous month.

But the pace of the slowdown may not be sufficient, at this point, to staunch oil’s price drop.

That’s primarily because the negative momentum will be hard to reverse without a serious move by the Organization of the Petroleum Exporting Countries, which has thus far offered no signs that it intends to cut oil production to tamp the worst oil drop in years.

In fact, it delivered quite the opposite message looking at recent remarks by Saudi Oil Minister Ali al-Naimi.

The slackening price of oil clearly has investors spooked. While it means cheaper fuel costs for businesses and regular folks, for some, the plunge suggests a more insidious problem is brewing: deflation abroad.

Trouble abroad

Oil isn’t the only worrisome story as investors look at the week ahead.

Europe’s intractable, problem child Greece has been acting up lately. Greek stocks posted their worst loss ever on Dec. 9. It was a pretty hideous week for Europe’s Stoxx 600 SXXP, +0.57% too.

Russian ruble rout

The decline of oil-dependent Russia’s ruble against the soaring dollar also will be a big story for investors to watch. The dollar recorded a 10.5% weekly gain against the Russian currency for the week ending Friday, it’s largest in six weeks.

International sanctions and the meltdown in oil factors prominently in Russia’s pain, which has some market observers worried that the Russian economy could face a repeat of its 1998 debt default.

 

Source: MarketWatch – Crashing crude may blow a $1.6 trillion hole in the global oil sector, annually

---