Coronavirus vs Oil War: Which Is Worse For Markets?

The stock markets have a new and even more vengeful bogeyman, and this time, it’s not coronavirus.

The U.S. bear market crashed to new lows on Wednesday, and the China coronavirus outbreak was the least of its worries this time around. An unexpected price war by the leading oil producers precipitated an oil price rout that in turn led to a ‘Black Monday’ equity selloff.

Oil logged its biggest daily decline since 2014, with the benchmark Brent crude oil futures driving 10 percent on Friday after a deal between OPEC and its allies, led by Russia, collapsed. Crude oil futures CLJ20, BRNK20 followed that pullback with another sharp 30 percent decline on Monday marking the steepest drop since the Gulf War in 1991.

The mayhem quickly spilled over into the broader market with the S&P 500 Index tumbling 7.6 percent while the Dow Jones cratered 2,013 points for its worst one-day performance since 2008. 

The market crash was so fast and so furious that it triggered a key circuit breaker that halted trading temporarily for the first time since 1997.

(Click to enlarge)

(Click to enlarge)

Source: CNN Money

Energy Stocks Crash

As expected, energy stocks bore the full brunt of the selloff with the industry benchmark, Energy Select Sector Fund (XLE), finishing 20.1 percent lower. XLE is now down 43.5 percent down in the year-to-date in what is shaping up as an annus horribilis for the sector.

Leading energy names were badly hammered, with ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) recording declines of 12.2 percent and 15.4 percent, respectively.

However, the oil majors had nothing on smaller producers.

Apache Corp. (NYSE:APA) and Occidental Petroleum (NYSE:OXY) each lost more than half their values on the day to finish 53.9 percent and 52.0 percent lower, respectively.

Marathon Oil (NYSE:MRO), Hess Corp. (NYSE:HES) and ConocoPhillips (NYSE:COP) did not fare much better, losing  46.6 percent, 33.7 percent and 25.3 percent, respectively.

Trump to the Rescue?

In a welcome turnaround, however, energy stocks enjoyed a sharp bounce in premarket trading on Tuesday as investors eyed the possibility of an economic stimulus despite the ongoing price war between Saudi Arabia and Russia. Related: Big Oil Prepares To Suffer In 2020

President Donald Trump on Monday said he will be taking “major” steps to gird the U.S. economy against the impact of the coronavirus outbreak. Trump is set to discuss a payroll tax cut with congressional Republicans on Tuesday where officials will present the president with several options, including financial assistance to industries affected by the coronavirus and the oil price crash. These measures may include cash injections, tax credits, payroll tax cuts, and tariff reductions on specific Chinese imports.

Oil prices and energy stocks are enjoying a broad bounce on the news. WTI Crude oil April 2020 futures CLJ20 are up 8.35 percent to $33.74/barrel while Brent Crude May futures BRNK20 have gained 8.25 percent to $37.20/barrel.

Meanwhile, XLE has shot up 8.9 percent ahead of the open after tumbling 20 percent on Monday. Among the biggest early gainers, Occidental Petroleum Corp. shares have rocketed 30.7 percent, Apache Corp. has hiked up 21.3 percent while Marathon Oil Corp. has soared 19.8 percent. 

Elsewhere, shares of Exxon Mobil Corp. have jumped 9.3 percent while those by Chevron Corp. have climbed 6.6 percent.

But it might be too early to start doing a victory lap just yet.

As Edward Moya, senior market analyst at OANDA, has told Reuters, the oil rally right now could be short-lived as the drivers for both the supply and demand side remain bearish.

After all, crude prices were already so low that there’s not much choice left but for U.S. shale companies to cut production, with bankruptcy already looming large over many in the shale patch.

And it’s that weakness that Russia is pouncing on, while the Saudis are unwilling to give up any market share--hence the oil price war. 

"Russia sees US shale as particularly vulnerable at the moment," Ryan Fitzmaurice, an energy strategist at Rabobank, was quoted by CNN as saying. "It is our view that Russia was targeting debt-laden US shale producers."

And there’s much more drama to come, with unconfirmed news reports leaking out of Saudi Arabia and hinting at major Royal disruptions as rumors circulate for everything from the potential death of the Saudi king to the arrest of key royals as the Crown Prince allegedly attempts to solidify his assumption of the ultimate crown. 

How oil prices--and a major, unexpected oil price war--will respond to these additional rumors is anyone’s guess at this point, but it will certainly seek to overshadow the steady progression of the coronavirus. 

If Saudi Crown Prince Mohammed Bin Salman succeeds in taking over every aspect of the crown, one can assume that the oil price war will take on an even greater intensity. 

By Alex Kimani for Oilprice.com

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