As expected, oil plunged to start the new week, after Saudi Arabia effectively declared a price war on Saturday with deep, across-the-board OSP cuts aimed at punishing Russia for Moscow’s refusal to acquiesce to production cuts in Vienna.
The market is now staring down both an acute demand shock from the containment measures associated with the global fight to stop the spread of the coronavirus, and a supply shock. Riyadh is reportedly preparing to ramp production starting next month, when the existing OPEC+ deal expires.
On Sunday, Mideast shares plunged the most since the financial crisis and Aramco dove 9%, falling below its IPO price for the first time. Oil’s opening drop was dramatic, to say the least. Brent fell more than 31%, and WTI dropped to $30.
It was the biggest one-day decline since January 17, 1991. This is made all the more incredible as it comes on the heels of Friday’s 10% drop.
“We believe the OPEC and Russia oil price war unequivocally started this weekend”, Goldman said Sunday. “The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus”.
Subsequently, crude would pare its losses, but just to give you an idea of how large an intraday move this really was/is, note that even after trimming the decline to below 20%, it still sticks out like a sore thumb going back to the Gulf War.
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S&P futures were limit-down. Earlier, the yen surged to the strongest since 2016 amid broad-based risk-off sentiment and analyst commentary warning of VaR shocks and “all-out” crises.
“Almost no asset will be totally safe given the potential for blown-up positions to spur profit-taking to cover the damage”, Bloomberg’s Garfield Reynolds wrote.
There was chaos in FX. The Norwegian krone dove to its weakest versus the dollar since 1985. USDMXN surged to the highest since January of 2017.
High yield CDS is likely to spike materially. As documented here on Friday and again over the weekend, collapsing crude will pile pressure on an already fragile-looking credit market. You’d assume junk protection will be in high demand.
“The scariest part about this development? During the 2014/15 oil price decline, energy debt credit spreads blew out to levels that caused distress in the general credit markets”, Kevin Muir wrote in a Sunday evening note. “In essence, the pain in the oil sector crept into financial markets”, he added.
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Meanwhile, bonds rallied, with 10-year yields in Australia and New Zealand hitting fresh record lows, while 10- and 30-year US yields fell below 0.50% and 1%, respectively, as investors continue to pile into duration and seek shelter amid a storm that appears to have morphed into a proper hurricane.
“It’s the confluence of negative events that present a problem for fragile markets, more so than the energy weakness”, JonesTrading’s Mike O’Rourke remarked Sunday, on the way to saying that market participants should “expect more weakness [as] the aggressive and sloppy nature of [last week’s buying] gives the impression of investors chasing ‘V’ bottoms, rather than allowing the market to clear”.
Oh, and one more thing (from Bloomberg’s ETF maven):
$UWT could get XIVed tmrw, we’ll see.. https://t.co/me4aUxWRA4
— Eric Balchunas (@EricBalchunas) March 8, 2020
Sounds like time to buy refiners and wholesalers, since I’ll never see it at the pump.
Everybody’s goin’ away
Said they’re movin’ to LA
There’s not a soul I know around
Everybody’s leavin’ town
Some caught a freight, some caught a plane
Find the sunshine, leave the rain
They said this town’s a waste of time
I guess they’re right, it’s wastin’ mine
Some gotta win, some gotta lose
OIL PATCH WORKER’s got the blues
Tomorrow is going to be very, very ugly.
Dow futures down 1000+, circuit breakers look likely at some point! Cannot wait to hear kudlow!
I need to get a little more panicked about this. It seems that the Russians want to teach US shale producers a lesson, regardless of whether the Saudis want to play ball. So the Saudis want to teach the Russians that the Saudis can absorb more pain than the Russians. Aren’t the Saudis right? All wars are costly. But won’t it become apparent that the Saudis have the upper hand? And when that happens, won’t the Russians agree to a new deal? The price war might go on forever, but I think it is more likely a question of when it will end. But by the end of the week, the markets may price it as a permanent condition.
Best outcome? Peak oil. Ridiculous that the world has made itself hostage to these thugs and authoritarians. The planet is on fire and the only thing these idiots are interested in is making money and playing games. Time to throw the bums out. Trump, Putin, the Sauds, ExxonMobil, BP, Royal Dutch Shell, Total, Eni, Pemex, etc. A plague on their houses.
sounds like the little boy who cried wolf wasn’t kidding…….LOL
I want to know where and to whom I send my routing info to get my anticipated helicopter money. I didn’t get any the last two times. I really do need a new refrigerator, the Kelvinator doesn’t make ice any more.
Actually helicopter money is a good idea. Essentially, we need to pay people to stay home, take care of the kids so the schools can close. $600, like Bush did in ’08, would be a great place to start.