Oil and stock price shocks

2020-03-10

in Daily updates, Economics, Politics

The always-slightly-overenthusiastic Slate.com reports:

The financial world resumed melting into goo on Monday thanks to the global coronavirus outbreak, with stocks falling so hard and fast in the morning that it triggered a rare 15-minute timeout on trading. By day’s end the S&P 500 collapsed by 7.6 percent—its worst showing since the financial crisis. The sell-off followed after Saudi Arabia’s leaders decided that now would be a good time to purposely crash the price of oil, a shocking and risky move likely to further destabilize a world economy that’s already wobbly thanks to the incipient pandemic.

The events that sparked Monday’s panic were the result of a clash between Saudi Arabia and Russia over what to do about oil prices, which have been tumbling ever since the number of coronavirus cases began to surge in China around January. Initially, the Saudis argued that its fellow OPEC members and their allies, including Russia, should respond by cutting production to prop up prices in the face of falling demand. But Moscow officially rejected that proposal on Friday.

So Saudi Arabia resorted to its Plan B. Over the weekend, the kingdom embarked on a surprise price war designed to cut into Russia’s sales, while promising to further flood the market by increasing its own production. It’s a move we’ve seen before from the country, which waged a brutal price war in 2014 and 2015 that eventually forced Russia to start coordinating its production with OPEC. But as of now, the Russians have responded by vowing to pump more of their own oil. We appear to be entering a standoff.

Of course this has been dominating the news for weeks, as people discuss the overlapping consequences of decreased oil demand due to coronivirus-induced reductions in travel and energy use; changing energy production policies from OPEC, Russia, and other jurisdictions; and whatever else is panicking global markets and making people willing to buy 30-year Treasury bonds with less than 1% interest.

Feel free to discuss scenarios. Will the coronavirus recession be the straw that brings down Trump? How will high-cost oil jurisdictions respond to these economic conditions? Will non-fossil fuel energy be hurt by cheap fossil fuel prices, or encouraged by concern about fossil fuel price volatility and political instability?

{ 4 comments… read them below or add one }

Milan March 10, 2020 at 12:03 am

anon@anon.com March 10, 2020 at 12:25 am

Corporate ventilators won’t protect these companies much when the price of a barrel is under US$40, let alone sub-30. The negative impact of the coronavirus on the global economy, hence energy consumption, had already infected oil markets.

As of last Friday, the price of a barrel was down over 30 per cent since the beginning of the year, trading in the low-$40 range. By week’s end the necessary vaccine was clear: OPEC+, the original 10 cartel members plus four others, including Russia, had to shut in more of their production to stop the price slide. That’s when the cherished Russian copy of The Art of War was pulled out of the drawer.

https://calgaryherald.com/commodities/energy/peter-tertzakian-this-crude-war-is-about-a-lot-more-than-oil-prices-and-market-share/wcm/e6286ba0-a53c-4e85-85f2-647805f0dbea

anon@anon.com March 10, 2020 at 12:34 am

For Canadian producers, there is good news and bad. On the positive side, the industry is battle-hardened. Over the past five years, innovative companies have already learned to endure some of the lowest prices in the world. But on the downside, there are many that are battle-weary, weakened and lacking a lifeline to capital.

On average, Canadian producers break even pumping oil if the price of a West Texas barrel is somewhere in the high-US$30 range. But that’s an average break-even threshold for an industry with a wide variation in costs; that means at that level about half the companies can’t pay their bills and half are treading water.

How do companies survive a price war? Wash hands of debt, don’t shake hands on bad deals, and keep your distance from high-cost assets.

. March 10, 2020 at 1:08 am

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