Tuesday, March 17, 2020

Oil Tumbles To 4-Year Low Amid Unprecedented Glut

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What’s happening: Oil prices nosedived through Monday’s trading session, to close at the lowest level since 2016.

What happened: After declining more than 23% last week, crude oil tumbled around 10% on Monday. Market sentiment was not lifted even by US President Donald Trump announcing plans to buy oil for the country’s Strategic Petroleum Reserve.

Surprisingly, the downturn in oil prices accompanied a sell-off in the stock markets, with investor mood remaining sullen despite the emergency rate cut decision by the Federal Reserve on Sunday.

Why it matters: Although the US is the world’s largest producer of oil, the country imports the commodity to meet its energy needs. The US imported around 7 million barrels of crude oil per day in 2019. A sharp decline in oil prices is typically a positive for the economy, as it lowers the import bill. The stock market has historically tended to move in the opposite direction of oil prices. This, however, has not been the case recently, as both oil prices and stocks trading lower.

Oil prices have been hit by both demand-side and supply-side issues. COVID-19 has weakened the demand for oil, given a slowdown in economies like China, which is the largest consumer of the commodity. Demand has also softened as several nations have imposed travel restrictions to control the spread of coronavirus.

A collapse in OPEC (Organization of the Petroleum Exporting Countries) talks has triggered a price war between Saudi Arabia and Russia. Both countries intend to raise supplies further, with Saudi Arabia gearing up to increase production to a record 13 million barrels per day.

The meeting of the JTC (Joint Technical Committee) of OPEC- and non-OPEC countries, which was scheduled for Wednesday, as been called off. Markets had hoped the meeting would lead to reconciliation talks between Saudi Arabia and Russia. Instead, the UAE has joined Saudi Arabia in increasing supplies to flood an already oversupplied oil market. Russia has also indicated that it can increase its production by 2 million barrels a day soon.

President Trump’s announcement that the US Department of Energy plans to purchase about 77 million barrels crude for the SPR over the next two weeks did not buoy the market.

US WTI crude plunged 9.5% to close at $28.70 per barrel on Monday. Prices had declined as low as $28.03 per barrel earlier in the session. Brent crude plummeted 11.2% to settle at $30.05 per barrel, after falling to $29.52 during the session. This is the lowest level for the commodity in four years.

WTI crude was trading higher by 2.7% at $29.46 per barrel during the Asian session.

What to watch: Oil prices are as much impacted by demand and supply factors as by speculation. Some market participants are expected to buy oil, taking advantage of the low entry point. Any announcements from the OPEC+ to control production or by Saudi Arabia, Russia and other major oil producers to increase supply will keep oil prices volatile.

The Markets Today

     

Investors will be watching European stocks today, with markets closing lower on Monday. Last week’s trend of losses continued yesterday, amid fears of the spread of coronavirus in Europe.

Context: European stocks closed at their lowest level in seven years on Monday. Fears of the coronavirus impact on the European and global economy kept investor sentiment low, despite the Federal Reserve’s efforts to control the virus fallout. Most of Europe moved to a lockdown mode to control the spread of COVID-19.

Details: After registering heavy losses last week, European stocks continued their downward momentum on Monday. Stocks recovered slightly from their session lows and trimmed some losses during the afternoon session, after the European Commission President Ursula von der Leyen announced a ban on nonessential travel to the region.

Spain has imposed a nationwide lockdown for 15 days and also declared a “state of emergency” after confirming the second-highest number of coronavirus cases in Europe, after Italy. The country has reported around 9,900 cases so far as per the latest update.

Investor sentiment has only temporarily been lifted by the US Federal Reserve cutting its benchmark interest rate to near zero and other leading central banks strengthening their efforts to provide a fillip to their economies.

The Stoxx Europe 600 Index closed down 4.9% to its lowest level since mid-2013, after dipping around 10% earlier in the session. The benchmark has declined 34% since its February peak. The FTSE 100 dipped 4%, while French 40 index closed down 5.75% on Monday.

Shares of travel-related companies continued to decline on Monday, with Tui’s stock closing down around 13% and British Airways parent IAG falling around 27%.

What to watch: Markets are looking forward to the ECB announcing more measures to ease the strain on the economy. Investors also await Eurozone’s ZEW Economic Sentiment Index and labour cost index. Hourly labour costs, which increased 2.6% in the third quarter, are expected to rise 3%. Germany will also be reporting its ZEW Indicator of Economic Sentiment. This economic data declined 18 points to 8.7 in February and is likely to fall to a negative reading of -26.4 in March.

Other Markets: US markets tanked on Monday, with the Dow, S&P 500 and Nasdaq down 12.93%, 11.98% and 12.32%, respectively.

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News shaping
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What else to watch today

     

Saudi Arabia's consumer prices, the UK’s unemployment rate, Canada’s foreign stock investment and manufacturing sales, Russia's industrial production as well as the US retail sales, Redbook index, industrial production, job openings, NAHB housing market index and business inventories.