US stocks drop on oil price worries

US stocks dropped yesterday on worries falling oil prices could set off a reversal in the high-flying energy sector, while Alcoa’s leaner-than-expected revenue disappointed.

Energy stocks led the S&P 500’s losses, with the S&P Energy Index down 3 per cent. Strategists were already worried the rally in energy stocks may have gone too far ahead of earnings, and a drop in oil prices could spark an extended sell-off.

“The leadership has been for the longest time in those sectors that are highly related to global growth and commodity prices. So once the commodity space starts rolling over, then equities are poised to follow,” said Robert Van Batenburg, head of equity research at Louis Capital in New York.

Oil prices tumbled for a second day following a Goldman Sachs forecast calling for a fall of almost $20 in the price of Brent. The International Energy Agency also said high prices could curb oil demand.

Unrest in oil-heavy regions of the Middle East and North Africa has fuelled a sharp rise in oil prices. The S&P energy index, by far the market’s top-performing sector in the first quarter, is up 11.1 per cent in 2011 -- well above the S&P 500’s gains of 4.5 per cent since the start of the year.

Signalling the start of the US first-quarter earnings period, Alcoa late Monday reported revenue that missed forecasts. Its profit, however, topped consensus expectations. Alcoa’s stock slid 6 per cent to $16.70 and was the Dow’s biggest percentage loser of the day.

Materials stocks in general fell in sync with declines in metals prices. Investors are worried that Japan’s massive earthquake and a nuclear crisis could weaken recovery prospects in the world’s third-largest economy.

The Dow Jones industrial average was down 117.53 points, or 0.95 per cent, at 12,263.58. The Standard & Poor’s 500 Index was down 10.30 points, or 0.78 per cent, at 1,314.16. The Nasdaq Composite Index was down 26.72 points, or 0.96 per cent, at 2,744.79.

Japan raised the severity of the Fukushima nuclear power plant accident to the highest level on the International Nuclear and Radiological Event Scale, putting it on par with the Chernobyl 1986 disaster. Dollar-denominated Nikkei future fell 1.3 per cent.

“Japan is looming large in the background,” Van Batenburg said, noting warnings about supply issues by Japanese companies. “Coming into earnings season with that kind of outlier, people are going to take a step back.”