The threat of a coronavirus-fueled oil war and continued panic around the virus brought markets to unprecedented lows Monday, triggering the first-ever forced halt on trading after the Standard & Poor’s 500 index sank 7% shortly after open. The Dow Jones industrial average sank as low as 2,000 points.
Oil prices tumbled into the $30s after Saudi Arabia and Russia deadlocked over production. The Saudis had been pushing for a cut in output to prop up prices but did a reversal when Russia balked. They decided, instead, to flood the market with hundreds of thousands of additional barrels per day at a steep discount — a move analysts fear may trigger a price war.
“Cheap oil is one thing. Super cheap oil is another,” said John Kilduff of Again Capital. “The stock market is looking at the oil price plunge as a canary in the coal mine of a disinflationary one-two punch, driven partly by cratering demand for transportation fuels and a wanton price war among the major oil producers” that will result in big losses for U.S. and Canadian producers.
Cratering oil prices might please consumers at the pump, but they would be devastating for oil companies and global markets, which have already been ransacked by coronavirus panic. Brent crude, the global oil benchmark, plunged more than 21% to $35 a barrel, its biggest drop since the Gulf War. The price of West Texas Intermediate crude, largely used in the United States, fell from about $41 to $32 a barrel Sunday night, a low not seen in four years.
Global markets were apoplectic. Japan’s Nikkei closed down more than 5%, while Hong Kong’s Hang Seng Index shed more than 4.2%. European markets were tumbling more than 7% across the board in midday trading.
Panic pushed the yield on the U.S. 10-year treasury below 0.4% for the first time in history Monday as investors fled for safe havens. The trajectory could be an ominous sign of a weakening economy because a low yield can indicate a lack of confidence in economic growth. Yields decline as bond prices rise. Gold, another safe haven, was up 0.4% in early trading.
Confirmed U.S. coronavirus cases surpassed 500 over the weekend, with cases in 30 states and the District of Columbia. Americans are beginning to face disruption to their work and travel, and the list of major events canceled in the face of the outbreak grows by the hour. Many grocery stores and pharmacies report being cleaned out of bottled water, disinfectant products, and shelf-stable and frozen foods. The virus has spread to more than 95 countries and sickened more than 110,000.
After two weeks of historic volatility, Wall Street on Monday was brushing up against the prospect of circuit breakers — a forced pause in trading, which has never happened in regular trading hours. The S&P 500 would need to fall 7% for the New York Stock Exchange to pause trading for 15 minutes. Another 15 minute halt would be triggered by a 13% decline. A 20% decline would end trading for the day.
“The broader stock indexes … finally succumbed to the unraveling of an unbelievable period of excessive optimism on the part of the investing public and speculators,” Steve Craig, chief energy analyst at Elliott Wave International, said in an email. “It’s easy to blame the global selling panic on fears of a coronavirus pandemic, but it has more to do with the unwinding of excessive investor optimism than anything else.”
In the face of Russian intransigence, the Saudis were unwilling to make unilateral cuts in production. But the problem they face as they enter into a price war is that Russia is better positioned to sustain a stretch of cheap oil.
The Russians believe cutting production would open the door to more American competition by raising prices and reducing supply, said Mikhail Leontiev, a spokesman for the Russian oil giant Rosneft.
“From the point of view of Russian interests, this deal [to cut production] is simply meaningless,” Leontiev told the Ria Novosti news agency Sunday. “We, yielding our own markets, remove cheap Arab and Russian oil from them to clear a place for expensive American shale. And to ensure the efficiency of its production. Our volumes are simply replaced by the volumes of our competitors. This is masochism.”
The Saudi oil company Aramco is offering discounts of between $6 and $8 for delivery in April, it announced late Saturday. Its shares fell below their original IPO price on Sunday for the first time on the Saudi exchange.
“$20 oil in 2020 is coming,” Ali Khedery, a former U.S. official in Iraq and onetime Middle East expert with Exxon, wrote on Twitter. “Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc. — may prove existential 1-2 punch when paired with COVID19.”
A production-cut agreement could still happen. An advisory-level OPEC meeting is scheduled for later this month, and the Russians have said they are open to further talks.