Wow! What an unpleasant week of trading we had to sit through. The Dow Jones tumbled 4.6%, the S&P 500 plunged by 4.19% and the ASX fell by a whopping 11% in a week.
Source: Google graph of ASX
The stock market is getting beaten down. With the left punch being from the Coronavirus and the right hook being from the Russian-Saudi Arabia oil war. Without a doubt, most of the population is aware of the carnage the coronavirus is causing. Especially, as the media continues to suffocate the world with negative news on the virus.
The world is less informed about the current oil war. However, with the Russian-Saudi Arabia tensions being exacerbated this week every media outlet is starting to pump out (no pun intended) the war.
Today we are discussing the story behind the Russia-Saudi Arabia oil war, how it is impacting the markets and where it leaves investors ?
The story so far
The restrictions on travel, factory activities and working in the office, which is in response to the coronavirus outbreak, is causing the demand for oil to plummet. Thus, oil prices are in free fall.
The negative demand shock in oil significantly affected the equilibrium price. Consequently, the Organization of Petroleum Exporting Countries (OPEC), on the 5th of March, agreed to reduce “oil production by 1.5 million barrels per day”, to offset the supply-demand imbalance.
Before, OPEC even announced its oil cut, Brent Crude oil and West Texas Intermediate was already down 30% and 25% respectively over January and February. Despite, the positive intentions of the oil cut, Russia decided to not comply with OPEC’s agreement. Mainly, because Russia did not want a repeat of the 2014 OPEC – U.S shale oil war. Also, Russia, like any nation, needs its export revenue.
Russia’s resistance saw its relations with Saudi Arabia breakdown. Resulting in the Saudi government increasing oil production and “selling it a discount of $6-$8 per barrel” on the 8th March. To add insult to injury, Saudia Arabia offered the biggest discounts to Russian oil customers.
In turn, the Russian- Saudi oil war began, and oil prices plunged another 30%. The sheer significance of the Saudia’s decision is highlighted in the fact that “Brent Crude experienced the largest drop in a day since the 1991 Gulf War”.
How are the markets/economies being affected?
The oil crisis fear is contributing to almost every index wiping off millions if not billions of growth this week. With the likes of
- Nikkie (Tokyo) – down 14% this week
- Hang Seng (Hong Kong) – down 4% this week
- MOEX (Russia) – down 5% this week
- DAX (Germany) – down 13% this week
- MSCI Tadawul (Saudi Arabi) – down 7%
- Shanghai SE (China) – down 3.4%
US, Russian, Asian and Saudi Arabian oil producers are being battered left right and centre. Because the decline in oil is causing the current and expected profitability of these businesses to go through the floor.
The nosedive in oil prices is also causing global economic anxiety and fear to creep into the markets. With Saudi Arabia slashing oil prices and ramping up production for April the bearish trend is likely to continue.
Huge oil companies like Chevron and ExxonMobil crashed by 11% and 16% respectively over the past week.
Source: Google stock graph of Chevron
Source: Google stock graph of ExxonMobil
Now while your local petrol might go down producers cannot make a good profit when oil is trading low. Ultimately, triggering potential layoffs, bankruptcies and a general slowdown in the oil industry. OPEC, Russia and Saudi Arabia can throw some of these beaten-down oil stocks a lifeline by driving oil prices up.
On the other hand, the plunge could benefit consumers and drive down the costs of production. Possibly improving the long-term growth for the oil industry. Just providing a balanced perspective here.
Where does this leave investors?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
The bearish trend is providing opportunists with the ability to snap up some of these big oil companies at a fraction of their true value. Which is also occurring with Australia’s ‘Big Four Banks’ right now. Moreover, the energy sector is known for its high dividend yield. Further, enticing investors.
Personally, oil investors should tread carefully. I would recommend against aggressive buying because the markets are still volatile.
Having a diversified portfolio would be key to mitigating risk in these turbulent times. Gradual and modest investing might be the way to go but please make sure you have done your own research first.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.