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.
“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.
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):
— Eric Balchunas (@EricBalchunas) March 8, 2020