The price of crude oil surged on Monday, pushing the Dow higher and offering a new wrinkle for investors as an unexpected oil supply cut from OPEC+ over the weekend shook markets to start the second quarter.
Near 1:20 p.m. ET on Monday, the S&P 500 (^GSPC) was flat, the Dow Jones Industrial Average (^DJI) was higher by 0.8%, and the technology-heavy Nasdaq Composite (^IXIC) was lower by 0.9%.
Crude oil was higher by more than 6% on Monday, with WTI crude oil — the U.S. benchmark — trading north of $80 a barrel while the international benchmark price, Brent crude oil, was trading near $85 a barrel.
A 4.5% gain in shares of Chevron (CVX) helped the Blue Chip Dow lead markets to start the week.
On Sunday, the OPEC+ oil cartel — which includes OPEC members plus Russia — announced it would cut daily production by more than 1 million barrels of oil beginning in May and running through the end of the year.
“Even though, like OPEC, we expect only subdued demand growth this year, the scale of supply cuts will send the oil market balance into a deficit in 2023, with an even larger deficit in Q4,” wrote Caroline Bain, chief commodities economist at Capital Economics, in a note to clients on Monday.
Last month, the price of oil dropped to an 18-month low as a glut of supply and fears over the global economy shook the oil market. Additionally, a surge in the dollar as investor concern rose over the banking crisis pressured oil.
But as worries over an acute financial crisis worldwide have ebbed, the dollar has eased and WTI rose by nearly $10/barrel over the final two weeks of March.
A renewed surge in oil prices also potentially complicates the task ahead for the Federal Reserve, which has raised interest rates in a bid to lower inflation. Although the Fed’s preferred inflation measures strip out the costs of food and gas, a marked rise in so-called “headline” inflation — which includes energy prices — could complicate the messaging on a pause in interest rate increases later this year.
Data out on Friday showed headline inflation as measured by the Personal Consumption Expenditures (PCE) Index rose 5% over the prior year in February; core PCE showed prices rose 4.6% over last year in February.
The more widely followed Consumer Price Index showed headline inflation clocked in at 6% over the prior year in February. The Fed targets 2% inflation.
On the economic data front, Monday brought investors two key readings on the U.S. manufacturing sector with data from both S&P Global and Institute for Supply Management showing a contraction in activity during March.
Both gauges indicated activity in the manufacturing sector contracted during March, with the ISM’s index dropping for the fifth-straight month and reaching a level of 46.3, the lowest since May 2020. Any reading below 50 for this index indicates contraction in the sector; readings above 50 indicate expansion.
“The March ISM Manufacturing report indicates that factory activity weakened through the end of last quarter,” wrote Oren Klachkin, lead U.S. economist at Oxford Economics, in a note to clients on Monday.
“We expect the sector to have its worst year since the global financial crisis — aside from the precipitous fall at the start of the pandemic — as weak demand and tighter credit conditions cause activity to contract.”
Monday’s drop in the ISM PMI marked the fifth-straight monthly declined and the fourth month in a row the index pointed to a contraction in manufacturing activity.
Elsewhere in markets on Monday, a merger in the entertainment world will draw investor attention after Endeavor (EDR), parent company of UFC, announced a deal to merge with World Wrestling Entertainment (WWE) to form a new company that will trade under the ticker “TKO.”
Endeavor will own 51% of the new company, with WWE holding a 49% interest.
The new company will have an enterprise value north of $21 billion while the companies recognized 2022 revenues of $2.4 billion with a 10% annual revenue growth rate since 2019, the companies said in a press release.
Endeavor CEO Ari Emanuel will lead the new company, with Dana White serving as President of UFC and Nick Khan overseeing WWE. WWE founder Vince McMahon will serve as executive chairman of the new company.
Shares of WWE, which had gained more than 30% this year through Friday’s close amid persistent speculation about a takeover, were down about 4% on the news on Monday. Endeavor shares were down 8% in early afternoon trading.
Tesla (TSLA) shares were also in focus early Monday after the company announced first quarter delivery numbers that set a new record for the electric carmaker as a cut in prices boosted overall demand for Tesla vehicles.
The company delivered more than 422,000 cars in the first quarter and made more than 440,000 new vehicles during the first three months of the year.
Tesla stock was down as much as 6% on Monday.
Tech stocks were also broadly under pressure to start the second quarter after leading a rally for markets in the first three months of the year, with shares of Amazon (AMZN), Microsoft (MSFT), and Nvidia (NVDA) all down more than 1% on Monday.
Investors will also keep an eye on Disney’s annual shareholder meeting, which was set to get underway at 1:00 p.m. ET.
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