Oil price drop crimps energy profits, drags down stocks

— -- Troubles in the oil patch are spilling into Wall Street as investors worry the same things hurting crude prices will injure the stock market, too.

Slack worldwide demand for energy and concern that the economic recovery will be slower than hoped are pushing oil prices down and threatening the profits and stock prices of energy companies.

That's discouraging investors from buying energy — and even non-energy — stocks. The Dow Jones industrial average sank 1.6% last week, bringing its 2009 loss to 7.2%.

"Investors expected a V-shaped economic recovery," says Stephen Wood of Russell Investments, describing the hopes some traders had that the economy would spring back to life. "Things aren't as bad as feared, but not as good as hoped."

Oil prices are at the epicenter of investors' cautious view of the economy's recovery. A barrel of oil fell more than 10% last week to $59.89, cracking below $60 for the first time since May 19. Friday the International Energy Agency said demand for oil is likely to drop 2.9% this year.

The strain on energy stocks is highlighting concerns investors have with stocks in general, including:

•A sudden stall in what had been an impressive rally since March. Investors have pushed the Energy Select Sector SPDR exchange traded fund, comprised of key energy stocks, down 17% since June 11. Some of the large players are seeing even larger declines this year. Shares of ExxonMobil xom, Conoco cop and Sunoco sun are down 18%, 23% and 49%, respectively.

The weakness in energy stocks is a worry because the sector accounts for more than 12% of the market value of the S&P 500. Energy stocks are a big reason the S&P 500 is down 7.1% from its high this year in June.

•Concern over earnings. Investors are counting on earnings season to be less scary than feared. But Chevroncvx unnerved investors Friday when it warned that second-quarter profitability would be hurt by poor refining margins and a weak dollar.

Earnings from energy companies will be key for the S&P 500. The sector's earnings are expected to fall nearly 68% this year, the biggest decline of all 10 sectors, S&P says.

Investors should brace for the oil-price slide to continue, says Christian Bendixen of institutional brokerage firm Bay Crest Partners. Prices for a barrel of oil could slide to between the mid-$30s to the low-$40s over the next few months, he says.

Still, investors kicking themselves for missing the stock rally since March, even in energy stocks, have a second chance now, says Russell Croft, manager of the Croft Value fund: "It is an opportunity for the long term to buy energy stocks in this pullback."

Rather than dwelling on the fact the recovery is slower than hoped, though, investors should take comfort in the fact "we may have seen the worst," S&P's Alec Young says.