Stocks close down 1.5% on oil decline; Energy drops 3%

U.S. stocks closed sharply lower on Wednesday, furthering the week's losses, as the price of crude fell to a new five-year low and the Organization of Petroleum Exporting Countries cut its demand outlook for next year.

The Dow Jones Industrial Average had its worst day since Oct. 9. The index fell more than 280 points before recovering some of those losses to trade about 270 points lower.

The energy sector led declines on the S&P 500, with a fall of more than 3 percent in the hour before the close.

Read MoreCratering oil blamed on US supply, Saudi 'treachery'

"OPEC saying 2015 is lower now gave oil a big chill. People are asking why is demand down, well economic activity is probably down too, so everybody is a little more cautious," said Kim Forrest, senior equity analyst at Fort Pitt Capital.

"The good news that the U.S. is seeming to grow might be offset by the rest of the world," she added.

OPEC reduced its estimate for 2015 by roughly 300,000 barrels a day, with the cartel saying the effect of the 40 percent drop in prices on supply and demand is uncertain.

After falling as low as $60.43 a barrel, Crude futures for January delivery closed down $2.88, or 4.5 percent, to $60.94 a barrel, the lowest since July 2009. The February gold contract dropped $2.60, or 0.2 percent, at $1,229.40 an ounce on the New York Mercantile Exchange.

The CBOE Volatility Index, a measure of investor uncertainty known as the VIX, spiked 23 percent to 18.39.

Toll Brothers traded lower after the home builder reported mixed quarterly results; Yum Brands fell after the operator of Taco Bell and other fast-food brands cut is profit outlook for the year for a second time; Costco Wholesale initially climbed after the warehouse-club operator posted a better-than-expected quarterly profit and GlaxoSmithKline declined after Bank of America Merrill Lynch downgraded its stock to underperform from neutral.

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"Oil continues to be the concern. Depending on who you talk to and in what time frame on which day of the week, oil may be a leading indicator, so there may be something behind the decline other than we have a lot of oil," said Paul Nolte, senior vice president, portfolio manager at Kingsview Asset Management.

"I don't know that for sure. I do know, historically at least, energy stocks have tended to lead the market, and that lead time is anything from three months to a year, and we're now six months into oil underperforming the overall market, so we may be in for some rough sledding," he added.

Energy companies led by Oneok, Chesapeake Energy and Denbury Resources were the session's worst performers among the S&P 500.

"From a valuation perspective, at least based on what we see from earnings estimates for oil companies, they are very inexpensive. But the market has never stopped at fair value, so it's like trying to catch a falling knife," said Nolte.

"You've got an energy-related sell off again today leaking into financials; the thought process there is if in fact this continues to get weak you might have some financial crisis in high-debt, frack-related loans out there; this is very levered industry," said Art Hogan, chief market strategist at Wunderlich Securities.

The Dow and S&P 500 closed at one-month lows.

The Dow Jones Industrial Average closed down 268 points, or 1.51 percent, at 17,533.15, with Boeing and Exxon Mobil leading blue-chip losses that extended to 29 of 30 components. Nike was the only blue-chip gainer.

The S&P 500 had its worst day since October 13 and ended the day down 33.6 points, or 1.63 percent, at 2,026.17, with the energy sector hardest hit and all 10 of its major industry groups in decline.

The Nasdaq closed down 82.4 points, or 1.73 percent, at 4,684.03.

Five stocks fell for each one that advanced on the New York Stock Exchange, where 897.7 million shares traded in the close. Composite volume was just above 4 billion.

The U.S. dollar held steady against the currencies of major U.S. trading partners.

The yield on the 10-year Treasury note used to figure mortgage rates and other consumer loans fell 4 basis points to 2.16 percent after a strong debt auction.

On Tuesday, U.S. stocks ended mixed, with the Nasdaq Composite rallying after stiff losses, as investor concern about the global economy ebbed.

Read More Stocks recover most of day's losses by the close

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

Coming Up This Week:

Thursday

Earnings: Lululemon Athletica, Ciena, Adobe Systems, Quiksilver, Esterline Tech

8:30 a.m.: Initial claims

8:30 a.m.: Retail sales

8:30 a.m.: Import prices

10:00 a.m.: Business inventories

1:00 p.m.: $13 billion 30-year bond auction

Friday

8:30 a.m.: PPI

9:55 a.m.: Consumer sentiment

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