The Covid 19 outbreak set the field but the direct cause of oil’s crash last week reads from an old playbook. WTI has been on a freefall losing over $16 in two days, prompting a wider stock market sell off that created another Black Monday as the Dow dove 7% in a single day. The day saw trading halted for a 15 minute period in an effort to stop the bleeding, but once it resumed, so did the panic. All indicators suggest it will get worse.
With Italy on full lockdown, China still seeing additions to their over 100,000 cases, and growing fears as the virus has taken hold in nearly every major country on the planet, traders are responding to fears that demand for petroleum products will continue to fall. But it was a political decision that took place last Friday that has prompted outright market panic.
The OPEC oil cartel met to discuss production cuts in order to bolster global prices last week. Instead, they took the 180 degree opposite approach in response to Russia’s decision to actually pump more oil. Russia and the Saudi’s had formed an alliance in 2016 in an attempt to answer the continued surging dominance of U.S. shale production. But when Russia stopped cooperating, the Saudi’s took off the gloves. Not only did they indicate that they would be willing to increase production to record levels last Saturday, they also announced discounted prices on their exports that haven’t been seen in decades.
With the collapse of the Saudi-Russia alliance, global markets reeled. Saudi Arabia’s actions were directly aimed at tanking prices in order to punish Russian defiance but the implications for U.S. shale producers is profound. This all out price war may be geared toward damaging Russia, but the obvious need not be stated: U.S. shale may be in big trouble.
A quote in a recent Bloomberg article from the President of Maglan Capital sums up the market sentiment: “We’ve never experienced anything like this before… There was demand weakness before and this clash of the titans between Russia and Saudi is the ultimate shock. In the near term, markets are going to be absolutely chaotic and it’s going to be an overwhelming time for the entire industry.”
Monday’s total collapse saw major producers stock dump value at a rate not seen in 11 years while smaller listed drillers and producers saw worse losses in some cases. Hess, Oxy, and Chevron all saw double-digit losses.
Further, the media is hammering the President for a lack of response to the emerging corona virus crisis which is serving to shake investor confidence further. As of Monday, March 9th, there were 729 cases in 36 states with 26 deaths. Most cases are in Washington, California, and New York. These number reflect a jump of 32% since Friday.
Though American’s have begun to panic as evidenced in runs on staples at stores across the country, it still serves to note that the mortality rate of the virus is relatively small at around 3.5%. Regardless, the panic has set in. Several high-profile public events have been canceled through-out the world and the U.S. including two large music festivals. Experts indicate the “crisis of perception” will most certainly worsen before it gets better.
At issue is how the U.S. shale industry will respond. Will it make the same mistakes it did during the recession, cutting jobs wholesale rather than finding efficiencies as it eventually did, or will it panic in lockstep with the rest of the nation?