Financial markets are developing the offensive, although reports of the spread of coronavirus remain alarming. More and more companies are experiencing supply disruptions due to disruption of their usual supply chains. It seems that the current situation can be a serious test of how China is integrated into the global economy, and how its problems can affect the growth dynamics of other regions of the world. In the meantime, we see that oil is almost the most affected in the financial markets due to the outbreak of the virus.
As a result of trading on Monday, quotes fell below $ 54, to the area where oil spent a couple of weeks at the end of 2018, at the peak of stock market fears. Recall, then, the participants were afraid that regular tightening of monetary policy would drastically slow down the growth rate of the largest world economies.
There is a stark contrast to how stock markets react this time around. On fears of coronavirus, Brent began to decline on January 20, losing 17% to its lows on Tuesday morning. The difference between the peak and minimum values for over the same time does not exceed 4%, and the net decrease over the same period is 1.7% (i.e., 10 times less). For comparison, between the beginning of October and the end of December, the S&P 500 lost about 20%, while oil doubled.
Such a difference in the reaction of stock and commodity markets, as well as the inability to grope for the bottom of the oil, are clear evidence of the weakness of the energy market. It is not so much a matter of coronavirus and fears of falling oil consumption in China. The underlying reason is the relative stagnation of demand with growth in US production. Even worse, markets are aware that current OPEC + quotas are forced short-term measures, as well as periodic interruptions in supplies from the Middle East.
There is a lot of oil in the market. Potentially, they are ready to mine even much more than necessary. Many countries are ready to do this as soon as possible. This is what makes quotes vulnerable.
In the short term, for a barrel price this is a bad signal. The current situation may well be called a "game of the market against OPEC." Now the bet is that artificial restrictions are an unstable system that will collapse sooner or later. The outbreak of coronavirus now makes us think that this will happen sooner rather than later.
In the early 1990s, the market (not only the Soros Foundation) made a bet against the Bank of England that it would not be able to maintain its course in an economic downturn. The market has won. It is likely that he will win this time as well, sending the oil into free swimming for a while. Unfortunately, for quotes, this will mean a sharp decline in the coming weeks and months. However, in the long run, such a strategy may turn out to be advantageous – including for oil producers.
FxPro Analyst Team