Oil leads global market tumble on ‘Black Monday’

Forex
Indices

The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.

Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.

Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.

Equities tank

Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.

US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.

European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.

Stocks most at risk

While stocks across the board tanked, several industries were hit harder than others.

Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.

Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.

Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.

New record lows for US bonds

The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.

Gold traded around $1,673 after hitting $1,700 over the weekend.

Cryptos join in with global market chaos

The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.

OPEC Preview: oil in a bear market

Week Ahead

OPEC Preview

December 5th, 2018

Production cut expected

OPEC and its allies convene in Vienna this week with expectations firmly favouring a supply cut in order to rebalance the market after the ramp in production seen ahead of the Iran sanctions. A cut in excess of 1m bpd seems assured, although it could be significantly higher than that. Anything up to 1.4m bpd seems anticipated, and therefore it may take more to significantly rally the market. A commitment to a longer and deeper cut will be required. Wire reports on Tuesday suggested a cut of at least 1.3m bpd is being worked on.

The meeting of the 26 OPEC and non-OPEC nations comes at a key moment for the market, with crude prices having slumped by around 20% or so over the course of October and November. The pace of that decline was startling and has undoubtedly forced a rethink of the increase in production we saw over the summer, particularly on the part of Saudi Arabia.

It’s not been alone: Saudi Arabia, Russia and the US have all been opening the taps this year. OPEC production in October hit the highest since December 2016 and was broadly flat in November. OPEC pumped 33.31m barrels in October, up 390k barrels from the month before. Saudi Arabian output is booming, climbing to a record 11m bpd. Undoubtedly this ramp cannot continue if the market is to rebalance given the declining expectations for demand growth.

Russian oil output hit a post-Soviet record high of 11.41 million bpd in October. However, this had dipped to 11.37 bpd in November. US production has surged to a record 11.475m bpd in September and is seen reaching 12.1m bpd next year (EIA). US production is now up 21% in the last year and the latest rise could mean more upward revisions to forecasts.

Trump factor

Donald Trump has repeatedly berated OPEC and others for trying to force up prices. Whilst there is pressure on the US-backed Saudi regime to acquiesce to demands to do nothing that would help lift prices, OPEC and its allies are set to push ahead. Although there are competing factions and priorities, no member wants a repeat of the collapse in prices four years ago.

US shale casts a long shadow. In particular, we must look at OPEC needing to act now to prevent a further squeeze on prices as more pipeline capacity comes on stream next year that would mean more US crude on the world’s markets. OPEC members are well aware that supporting prices is good for US shale producers, but they seem unwilling to go head to head again.

Qatar leaves

The question it leaves us with is to what extent OPEC is losing its relevance. Qatar may be a small player (approximately 2% of OPEC production), but it could suggest smaller suppliers are starting to lose faith in the Saudi-led cartel. Could it be the first domino? We must look at it in context of the regional powerplays. Whilst it may indicate a lack of consensus among members about cuts, it would be more likely to reflect the political tension between Qatar and its neighbours, in particular Saudi Arabia, which along with Egypt, the UAE and Bahrain is maintaining a trade embargo on the country. It would seem sensible for Qatar to distance its energy policy as much as possible from Saudi influence, particularly given its focus on natural gas over oil. It seems unlikely that Qatar’s decision will cast much of a shadow over the meeting or prevent an agreement.

Technical picture

Speculative positioning has turned south. CFTC figures show net longs down to their lowest in a year, down to 348k contracts by the beginning of November from 739k in February.

On the Brent daily chart, we see a firm bounce at the start of the week, with Brent breaking the downtrend resistance level and looking to push up to the 23.6% retracement of the recent down move at around $64.65. However yesterday’s failure to maintain any bullish momentum suggests there is little appetite at present for a pre-OPEC rally.

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