Oil futures flipped between positive and negative during U.S. morning trading, whipsawing the markets.
Oil producers' shares have slid for a week as crude prices hit fresh lows on fears the world is running out of storage capacity and a global supply glut intensifies. Initially down as much as 3.3 percent, the S&P 500 oil sector <.SPNY> was down 1.5 percent in the early afternoon.
Markets in energy-infrastructure stocks were active as well, as Kinder Morgan (>> Kinder Morgan Inc) lost 6.5 percent. Investors are worried the company will cut its dividend after years of double-digit growth.
Exxon Mobil Corp (>> Exxon Mobil Corporation) fell 1.9 percent, Chevron Corp (>> Chevron Corporation) was down 1 percent and Schlumberger Ltd (>> Schlumberger Limited.) fell 1.2 percent.
The sell-off came as Wall Street estimates called for sharp declines in energy companies' 2014 earnings amid mounting credit stress and the slump in crude prices.
The SIG Oil Exploration and Production index <.EPX> hit its lowest level since March 2009 before recovering to a loss of 0.1 percent. The Market Vectors Oil Services ETF (>> Market Vectors Oil Services ETF) hit its lowest point since October.
The Energy Select Sector SPDR Fund (>> Energy Select Sector SPDR (ETF)) shows a year-to-date loss of 22 percent, making it the worst-performing S&P 500 <.SPX> sector fund.
There were some notable exceptions. The ALPS Alerian MLP ETF <AMLP.P> - which includes companies that pipe, store and process oil - added 2.8 percent. Williams Companies Inc (>> Williams Companies Inc), a specialist in natural gas infrastructure, rose 3.1 percent.
Despite benefiting from lower oil prices, airlines moved sharply lower as Southwest Airlines (>> Southwest Airlines Co) estimated its fourth-quarter operating revenue per available seat mile to be roughly flat to down 1 percent. Southwest's stock dropped 9.4 percent.
Other airline shares tracked by the S&P Composite 1500 Airlines Index also moved down <.SPCOMALI>, by 4.4 percent, halting the December rally fueled by falling oil prices.
Traders have responded to the turmoil in energy sector shares by taking to options on the sector ETF and individual shares in a bid to guard against further declines.
Open interest in the Energy Select Sector SPDR Fund's options has jumped to 1.2 million contracts, up 40 percent over the last month.
Puts, typically used to bet on declines in the fund's shares, outnumber calls, used for placing bullish bets, by a 1.8-to-1 margin, the highest since early October, according to options analytics firm Trade Alert data.
"We're seeing large institutional block trades suggesting aggressive hedging activity," Trade Alert options analyst Fred Ruffy said.
On Tuesday, XLE puts were busy, with 53,000 contracts traded in the first three-and-a-half-hour of trading, about twice the normal pace. Puts betting on the fund's shares dipping below $59 by mid-January were among the most actively traded contracts.
The fund's shares have dropped 9 percent in December and were down 46 cents to $61.78, on Tuesday.
Elsewhere in the sector, demand for protective options was high, with more than 485,000 puts traded.
Put options on oil services company Weatherford International Plc (>> Weatherford International plc), offshore oil driller Ensco (>> ENSCO PLC) and oil and natural gas company Anadarko Petroleum Corp (>> Anadarko Petroleum Corporation) were among the most actively traded contracts among energy names.
(Reporting by Trevor Hunnicutt, Terence Gabriel, Sinead Carew, Lewis Krauskopf and Saqib Ahmed; Editing by Dan Grebler)
Stocks treated in this article : Exxon Mobil Corporation
, Anadarko Petroleum Corporation
, Chevron Corporation
, Southwest Airlines Co
, Schlumberger Limited.
, Southwestern Energy Company
, Williams Companies Inc
, Energy Select Sector SPDR (ETF)
, Kinder Morgan Inc
, Market Vectors Oil Services ETF
, ENSCO PLC
, Weatherford International plc