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- A weekend of oil-market chaos has dragged US stocks near bear market territory and added new risks to the coronavirus-rattled economy.
- Tensions in the commodity market spiked on Friday after Russia declined to join OPEC in curbing oil production in the wake of weakened demand.
- Saudi Arabia fired back late Saturday, slashing its oil prices the most in two decades and sparking a price war between the world’s two largest oil exporters.
- The combination of rising coronavirus cases and fresh oil-market tensions tanked US stocks on Monday’s open and pushed Treasury yields to record lows.
- An oil price war could swiftly tear into high-risk credit markets and spark a major economic downturn, Seema Shah, chief strategist at Principal Global Investors, wrote Monday.
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A weekend of international disputes sparked an unparalleled oil price war, tanked the US stock market, and prompted new fears of a coronavirus-driven recession.
Pressure on the oil industry has mounted since the coronavirus started dominating global headlines over the last couple months. Factory shutdowns in China – combined with a slowdown in global travel and tourism – have pushed oil demand to fresh lows, prompting attempted intervention from the Organization of Petroleum Exporting Countries (OPEC+).
The plan was for the coalition to broadly reduce production to buoy the price of oil – an extension of a cooperative effort between nations dating back years. But talks crumbled late last week as Russia refused to meet Saudi Arabia’s request for output cuts, resulting in a sharp oil sell-off that erased 11% from prices.
That set the scene for a chaotic weekend that saw Saudi Arabia cut its official selling price by the most in roughly 20 years. That kickstarted a worldwide price war as global oil authorities raced to undercut one another in order to win market share.
Oil futures quickly plummeted 31% within minutes when trading began on Sunday evening – their biggest drawdown since the Gulf War in 1991. What followed was a rush of investor panic that led to further selling across risk assets. West Texas Intermediate, the standard for US oil pricing, sank as much as 34% to $27.34 per barrel.
Even after suddenly lowering prices, Saudi Arabia is still threatening to boost output to record levels, which would dilute them further. Not to be outdone, Russia has said it will also step up production in April, once the existing OPEC+ pact expires at the end of the month.
Bleeding into stocks
The commodity-market slump fanned the flames of an already-volatile stock market on Monday morning. The S&P 500 almost immediately dropped 7% in the opening minutes, prompting the first halt in trading – known as a “circuit breaker” – since the depths of the financial crisis in 2008.
The benchmark index is now down more than 17% from a record high reached on Feb. 19, and its 11-year bull market streak is looking increasingly shaky.
The damage came on the heels of two weeks of harsh sell-offs as the spreading coronavirus drove renewed fears of a growth slowdown and eventual recession. US stocks dropped into correction territory in February’s last trading sessions. While markets staged a modest recovery on March 2, the following days wiped out most gains made month-to-date.
This trepidation has also manifested itself in the bond market, where Treasury yields have plummeted as investors have fled to safety. The entire yield curve slid below 1% for the first time ever amid this historic rush to haven assets.
The S&P 500 is now roughly 3 percentage points from entering bear-market territory, and continued stress in the oil market could fuel further losses. The commodity’s price drop places significant risk on the high-yield debt markets populated by energy firms, Seema Shah, chief strategist at Principal Global Investors, said Monday. Once-stable credit lines are facing their biggest threat yet and their collapse could spark the beginnings of a global recession, she added.
“This safety blanket has now been ripped away and, with the spectre of bankruptcies and defaults rising, the R-word is now on everyone’s lips,” Shah said.
A look ahead
The oil situation is “even more dire” than the price war seen in November 2014, Goldman Sachs analysts wrote Sunday. The bank expects Brent prices to plummet to $30 per barrel in the second quarter of 2020, adding that $20 per barrel could be seen with potential price dips.
A near-term agreement could ease the commodity’s pricing, but oil will likely drop further before countries rush to the rescue, Goldman said.
“While we can’t rule out an OPEC+ deal in coming months, we also believe that this agreement was inherently imbalanced and its production cuts economically unfounded,” the team of Goldman analysts wrote. “As such, we base case for now that no such deal occurs, with any response only likely at sharply lower prices anyways.”
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