On Monday, March 9, oil prices decreased by over 30%. The bad news continues. One collapse was followed by the next one - all world exchanges on this day showed the worst results since the 2008 global crisis. For the first time during this time, the New York Stock Exchange stopped trading for 15 minutes. Europe and Asia have also been panicking. What are the causes and consequences of the oil and stock market storm.
Reason - Non-agreement
On March 6, OPEC+ countries failed to reach a deal on oil production cuts.
Note. OPEC+ is an organization of petroleum exporting countries established in 1960 to stabilize the cost of raw materials. It includes Saudi Arabia (de facto, the largest oil producer), Venezuela, Iran, Algeria, Angola, Equatorial Guinea, Iraq, Kuwait, UAE, Libya, Nigeria, Congo. The Russian Federation is not part of the OPEC, but is a regular observer in the organization, so it participates in the organization's conference sessions, meetings and other events.
On the eve of the talks, OPEC and Russia discussed cuts in oil production against the backdrop of declining world prices due to the Wuhan coronavirus epidemic.
Detail. Due to the spread of Covid-19, and the growing concern of investors about lower demand for gasoline, diesel fuel, jet fuel, world oil prices have fallen sharply. Reducing production, advocated by Saudi Arabia and a number of other countries, would help maintain a balance in the market in the context of low demand. The Russian Federation did not like this proposal.
As a result, Moscow at the Vienna talks refused to deepen the restrictions. Without the participation of Russia, OPEC countries see no reason to continue limiting production artificially.
The Kremlin's decision came as unexpected for the rest of the organization's members.
“Ministers were so shocked, they didn't know (OPEC energy ministers, - 112 international), they didn’t know what to say,” one of the meeting's participants told Bloomberg.
The current agreement will expire on April 1, after which all the cuts on oil production will be lifted. The increase of Russian production will depend only on the plans of the oil companies. That is, now every man for himself.
It’s Important. Prior to this, Saudi Arabia, other member countries of the organization, and Russia limited the production, thus maintaining prices.
Consequence - Black Monday
Immediately after market opening, on March 9, world oil prices decreased by 31% to $31.43 for a barrel (at the time of closing the market on March 6, the price was already $45.27).
WTI oil, which is traditionally lower than that of Brent, has decreased by 26% to $30.7 for a barrel.
The crash has become a record since 1991, when oil asset prices collapsed in connection with the Gulf War.
The situation tense as it was exacerbated by Saudi Arabia, offering record discounts on its oil and promising to increase production to 12 million barrels per day. The country is trying to encourage oil refining companies in Europe, Asia and the US to buy its oil.
The consequences of the statement by the largest oil producer were upsetting ⬇
Panic. Stock markets crash
On Monday, March 9, European, Asian and American stock markets have crashed.
The sharpest drop in Europe was spotted of Italian index FTSE MIB: -10%, the least affected by a financial crisis country is Turkey: -4.2%.
Generally, the situation at the European stock markets looked so: Norway: -8.9%, Spain: 7.5%, France: -7.2%, Germany: -7.1%, the Netherlands: -7.1%, the UK: -6.8%, Sweden: -6%.
The situation outside Europe also was developing not the best way: Saudi Arabia: -7.2%, Australia: -6.6%, Indonesia: -6.6%, South Africa: -5.5%, India: -5.4%, Japan: -5%, South Korean: -4.2%.
The trading at the New York stock market in the morning right after the opening was stopped in 15 minutes. It took place for the first time after the financial crisis in 2008-2009.
The index of the largest American companies S&P 500 collapsed by 7%. Dow Jones fell by 7.2%, NASDAQ Biotechnology Index lost over 7%.
Mostly, the stocks of the oil majors suffered the most. The issue is about Chevron and Exxon Mobil, which lost almost 10%. The energy index collapsed by 20%.
What is said in the world
U.S. President Donald Trump expressed the opinion that the fall world prices for oil is good for consumers.
Good for the consumer, gasoline prices coming down!— Donald J. Trump (@realDonaldTrump) March 9, 2020
Trump believes that the reason of the collapse of the oil market is the dispute between Saudi Arabia and Russia, as well, as fake news.
Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!— Donald J. Trump (@realDonaldTrump) March 9, 2020
Rosneft called the deal with OPEC to be not in the interests of Russia.
“From the points of view of the interests of Russia, this deal is senseless. We, trailing our own markets, remove from them cheap Arabian and Russian oil to make room for expensive shale American. And provide the efficiency of its extraction,” RBK reported citing Spokesperson of the company Mikhail Leontiev.
Mass media write that the initiator of the deal break of Russia and OPEC was Head of Rosneft Igor Sechin.
According to Reuters, in December 2018, he wrote a letter to Russian President Vladimir Putin in which he noted that the partakers of the OPEC agreements and countries, which joined it, play into the hands of the American oil-extractors.
According to two authoritative sectoral sources, the letter became a clear signal for other high-ranking officials who deal with the energy police that Sechin wants to end the deal with the OPEC.
“The letter is a threat to the deal extension. But anyway, Putin is the ultimate decision maker,” one of the sources said.
The Bell reported that Russia’s Energy Minister Aleksandr Novak went to Vienna for the talks with OPEC with already agreed solution.
“And its suggestion was that Russia would not reduce the extraction more,” the Russian news agency noted, citing its sources
Meanwhile, according to the predictions of Goldman Sachs Investment Company, the price for oil mail fall up to $30 per barrel.
The analysts of Bank of America do not exclude the decline of quotations Brent lower than $30 per barrel in the coming weeks.
The market started to reactivate gradually. The cost of Brent oil barrel in London trade increased by 7%.
As for 7 a.m. of March 10 (Kyiv time), asset prices reached $36,94 for a barrel, which is $2,58 more than after the restart of trade.
Consequences for Ukraine
FIRSTLY. The value of GDP warrants fell by 9.2%, and the yield of Eurobonds increased by 1.1%.
After Monday, GDP warrants were worth about 81.8% of par value, although past week it was 90%, and two weeks ago they gave 107.5% of par value.
Eurobonds with maturity in 2020 are now quoted at a rate of about 4.9% per annum, in 2021 - 5.7%, 2022 - 6%, 2023 - 6.9% and in 2025 - 7.3% per annum.
The return on securities with maturity in 2025 reached 7.6%, in 2026-2027 - 7.7-7.9%, and the longest-term securities with maturity in 2032 - 8.3%.
SECONDLY. The dollar flew up in exchange points. On Tuesday, March 10, the average exchange rate of the American currency is 24.90-25.60 UAH.
The last time such a dollar exchange rate was recorded in August 2019. Another increase like this was recorded on March 10: the dollar went up by 15 kopecks in buy rate and 40 kopecks - in sell rate.
THIRDLY. In perspective. The Antimonopoly Committee said that they expect from the Ukrainian gas stations to reduce the cost of gasoline.
“The Antimonopoly Committee will carefully study the dynamics of prices in the retail market for petroleum products. After all, the price of not only crude oil, but also a large wholesale of gasoline and diesel fuel expects a significant drop,” the press service of the agency said.
The committee specified that large sellers of gasoline quite often instantly increase gas prices in case oil prices rise, but in case of cheaper oil prices fuel prices fall more gradually.