West Texas Intermediate gained about 8 percent higher in choppy trade after the Energy Information Administration said U.S. inventories rose by 7.8 million barrels last week. Crude prices briefly erased gains following the data release, but surged on a weaker dollar.
The dollar traded 1.77 percent lower against a basket of currencies, with the euro gaining 1.5 percent against the greenback, as weak U.S. services data suggested another Federal Reserve rate hike seems more unlikely.
“I … believe oil will dictate stock prices,” said Peter Cardillo, chief market economist at First Standard Financial. “I think it’s safe to say we are highly dependent on oil.”
The ISM non-manufacturing index January reading came in at 53.5,below the expected 55.1. It is also the lowest reading since December 2013.
“The lions share of the U.S. economy is services,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, said ahead of the data release. “If we see a slump in [ISM], we’re going to see a sell-off in the market.”
The Dow Jones industrial average opened 100 points higher, but fell over 150 points amid the weak ISM reading and the rise in crude inventories, before holding lower in afternoon trading.
“We’re in a textbook transition from a bullish environment into a bearish environment,” said Adam Sarhan, CEO of Sarhan Capital. “What’s happening now is strength is being sold, not weakness being bought.” “The inability to make a meaningful bounce off the January lows signals, to me, … we’re in the early stages of a bear market, he said.
The Nasdaq failed to hold initial gains, falling about 2 percent at the lows, before trading about 1.6 percent lower. The S&P also slipped as financials weighed.
“There’s some level that marks the right intersection of where the economy is,” said Steve Blitz, chief economist at ITG Investment Research. “The equities market is in the process of finding it.”
Oil initially rose on news that Russia may be open to a deal with OPEC in order to cut production.
Art Hogan, chief market strategist at Wunderlich Securities, said that “when you start getting more people talking about production cuts,” oil has a greater potential to climb back from its lows.
However, Schwab’s Frederick, said “I think the oil bounce is more of a technical bounce.” “We’ve had a pretty steep sell-off in oil recently.”
“Equities and oil are very correlated right now, whether right or wrong,” he said, “At some point, we’re going to have to break from that.”
Wunderlich Securities’ Hogan said the de-coupling of oil and stocks would take place if crude prices manage to hold above $30 a barrel.
ADP reported that private U.S. payrolls jumped 205,000 last month, above a consensus estimate of 195,000.
“Bottom line, no job growth in manufacturing and job losses in energy are certainly being offset by other areas of the economy, particularly services. This begs the question over sustainability as none of us should be blind to what is going on with the macro,” Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.
Investors also digested a slew of corporate earnings reports from companies like, General Motors, Merck, Yahoo and Comcast, among others.
“The problem is that we’ve got generally lousy [earnings] numbers with no hopes of them getting any better,” said Maris Ogg, president at Tower Bridge Advisors.
U.S. futures held near the flatline for most of the morning on Wednesday, before rising on remarks made by New York Fed President William Dudley.
According to MNSI, Dudley said that continued tightening on conditions would weigh on the Fed.
He also reportedly warned that additional strength of the U.S. dollar could have “significant consequences” for the U.S. economy.
His comments come as the Fed ponders its next move on monetary policy. The Federal Open Market Committee in December raised its interest rate target a quarter point after seven years of keeping it near zero. It was the first rate hike in more than nine years.
U.S. Treasury yields whipsawed Wednesday, with the benchmark 10-year yield trading at 1.85 percent, after hitting a one-year low.
In Europe, stocks closed lower, with the pan-European STOXX 600 index falling 1.6 percent. Asian equities fell broadly overnight, with the Nikkei 225 index dropping 3.1 percent.
The S&P 500 dropped 13 points, or 0.7 percent, at 1,890, with financials leading five sectors lower and energy the greatest advancer.
The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, traded above 23.
Decliners were a step ahead of advancers at the New York Stock Exchange, with an exchange volume of 649 million and a composite volume of 3.22 billion as of 2:15 p.m.
WTI rose $2.19 to trade at $32.08 a barrel. Gold futures rose $16.10 to $1,142.50 an ounce.
On tap this week:
Earnings: MetLife, Allstate, AvalonBay, Boston Properties, GoPro, Lincoln Natl., NXP Semiconductor, Yum Brands
Earnings: AstraZeneca, ConocoPhillips, Philip Morris, Cigna, Clorox, Credit Suisse, Dunkin Brands, NY Times, Tempur Sealy, Hartford Fincl., LinkedIn, News Corp., Symantec, Decker’s Outdoor, DeVry Education, Lions Gate
7:30 a.m.: Challenger Job-Cut Report
8:30 a.m. Initial claims; productivity and costs
10 a.m. Factory orders
10:30 a.m.: Natural gas inventories
4:30 p.m.: Fed Balance Sheet/Money Supply
5 p.m. Cleveland Fed President Loretta Mester on economy, policy
Earnings: BNP Paribas, Nippon Telegraph, Estee Lauder, Toyota Motors, Tyson Foods, Moody’s, Weyerhaeuser, Aon, CME Group, Ametek
8:30 a.m. Employment report; international trade
1 p.m.: Oil rig count
3 p.m. Consumer credit, Treasury STRIPS
*Planner subject to change.
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