Market News & Analysis
Throwing oil on the fire
Tony Sycamore March 9, 2020 12:35 PM
A torrid start to trading for the new week as concerns around the impact of the coronavirus intensified in line with the rapid spread of the Covid-19 virus outside of China. As well as oil producers failing to agree on a new deal to limit supply after Russia blocked OPEC’s plan to push through an additional 1.5mb/d of supply cuts.
The existing supply agreement of oil producers expires on the 1st of April. From this date on, there will be no caps in place on the amount of oil that the 24 nations in the OPEC + arrangement can supply creating a dangerous imbalance at a time when demand for oil has softened considerably due to the impact of the coronavirus.
This is the key reason why crude oil futures have fallen by almost 25% from Fridays close to be trading just above $30.00/bbl at the time of writing (weekly chart below).
The OPEC disagreement demands trader's attention as it will force a dramatic re-alignment of the oil market as low-cost producers such as Saudi Arabia and Kuwait increase supply at the expense of high-cost producers. High-cost oil-producing countries with fragile financial systems such as Russia and Venezuela become vulnerable to a credit event.
So too, higher-cost oil-producing companies based in the U.S and Canada. As evidence of this, we need only look back to the start of 2016 to see how falling oil prices impacted individual oil companies' stock prices.
At a more macro level, the fall in crude oil prices into the start of 2016 also sparked deflationary concerns that weighed on U.S. stock markets as a whole. It’s no coincidence that the S&P 500 bottomed at 1802.5 in the very same week of February 2016, that crude oil futures traded to their $26.05 low (highlighted chart below).
After the weekend's events in the oil market, the relationship between S&P 500 futures and crude oil futures is again on display. Effectively oil producers have thrown oil on the stock market fire lit by Covid-19, thereby adding another layer of complexity to markets.
Source Tradingview. The figures stated areas of the 9th of March 2020. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.