It's war. Oil war

Fiona Cincotta
By :  ,  Market Analyst

The gloves came off in the oil market and the ensuing crash in prices pulled stock markets, bonds and gold down with it.

The FTSE is trading down more than $8.5% with oil stocks leading a bloody selloff. Royal Dutch has dropped almost 22% with BP trailing behind, down 19%, while mining and metal firms make most of the rest of the top ten fallers.  

What caused the panic selling?

After weeks of trying, and failing, to persuade Russia to coordinate scaling back oil production in order to balance out the effect of the coronavirus Saudi Arabia decided to not take it lying down and instead to start pumping more oil from April. From the end of this month it will also sell its oil cheaper to Asia by $6 a barrel, to Europe $7 and to the US by $8.

Although most analysts interpret this as a move against Russia, Saudi’s decision will actually hurt US producers the most because they produce at a far higher cost than either of the two countries.

Brent, WTI: where is the bottom?

Over the weekend WTI dropped to $28 and Brent to nearly $30 before bargain hunters stepped in and lifted prices. Those two levels are a good indicator of how low the market is willing to go at this moment and that Brent below $30 may not be sustainable, even with declining global demand. The main reason is that lower prices will push a whole layer of producers to the brink of bankruptcy over the coming months and will remove their production from the market rather than OPEC’s.

Corona spread intensifies in Europe

In amid the crashing stocks investors have looked away from the coronavirus for the moment, which may be unwise given that news in Europe is getting worse. Italy remains the most visible crisis point after it blocked off the northern part of the country, including financial capital Milan, and restricted the movement of about 16 million people. However, the number of cases in France has nearly doubled over the weekend, reaching 1,209, and the spread in Germany also intensified. Neither of the countries has introduced drastic measures on the scale of Italy's, yet but may end up being forced to do so if the number of cases continues rising at current speed.

Related tags: Oil UK 100 Coronavirus OPEC

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