Why another big drop in oil could pull down the whole S&P 500
When oil prices nose-dived more than 50% last year, energy stocks tumbled 26.5% from June to January.
Right now, the oversupply that prompted the oil crash is getting worse and could further weaken oil prices, according to the International Energy Agency.
The US is running out of storage space for oil, to the extent that storage is becoming a tradable commodity.
In a note Friday, Citi's Tobias Levkovich wrote that a nuclear deal with Iran that may bring its production back online could flood the oil market even more. That would put more downward pressure on oil prices and energy stocks.
And Levkovich adds that this could possibly weigh down the whole S&P 500:
"For those worrying about the broader market, it is worthwhile to note that Energy now is the highest beta sector in the S&P 500 and one of the highest industry groups (see Figure 13 and 14) and thus weakness could drag down the S&P 500 somewhat as well. Hence, the Cushing capacity problem may have more meaningful near-term implications."
Beta is a measure of a stock's volatility as it relates to the broader market, and vice versa.
A stock with a beta of 1 tends to move in-line with its benchmark index, while stock with a beta from 0 to 1 will generally move in the same direction - but less - than the index, and beta's over 1 will move in the same direction - but more - than the index.
Because the energy sector's beta is so high, it would take a pretty big move in energy stocks to make a significant move in the broader market. It's this potential further decline to the downside, which Levkovich warns could be bad news for the S&P 500 overall.
Here is Citi's table summarizing the betas of various sectors and industries:
On Sunday, West Texas Intermediate crude oil broke below $44 for the first time in six years. It fell by more than 4% on Monday.
By Citi's forecast, it could sink to as low as $20.