Brent Crude, used to price two-thirds of the world’s crude oil supplies, experienced the largest drop since the 1991 Gulf War on the night of 8 March.
Economic Activity Due to the Virus
Chinese demand slump resulted in a meeting of the Organization of Petroleum Exporting Countries (OPEC) to discuss a potential cut in production to balance the loss in demand.The cartel initially made a tentative agreement to cut oil production by 1.5 million barrels per day (bpd) following a meeting in Vienna on 5 March 2020, which would bring the production levels to the lowest it has been since the Iraq War. Meanwhile, analytics firm IHS Markit predicted a fall global demand for crude to fall by 3.8 million bpd in the first quarter of 2020, largely due to the halt to Chinese economic activity due to the virus it also predicted the first annual reduction in demand for crude since the financial crisis of 2007–08.
However, Russia refused to cooperate with the OPEC cuts, effectively ending the agreement it has maintained with OPEC since 2016. Russia balked as it believed that the growth of shale oil extraction in the U.S., which was not party to any agreement with OPEC, would require continued cuts for the foreseeable future. Reduced prices would also damage the U.S. shale industry by forcing prices below operating costs for many shale producers, and thus retaliate for the damage inflicted on Russian and OPEC finances. The breakdown in talks also resulted in a failure to extend the cut in output of 2.1 million bpd that was scheduled to expire at the end of March.
WTI Price 2019 2020 Image.
On 8 March 2020, Saudi Arabia unexpectedly announced that it would instead increase production of crude oil and sell it at a discount (of $6–8 a barrel) to customers in Asia, the US and Europe, following the breakdown of negotiations. Prior to the announcement, the price of oil had fallen by more than 30% since the start of the year, and upon Saudi Arabia’s announcement it dropped a further 30 percent, though later recovered somewhat.Brent Crude, used to price two-thirds of the world’s crude oil supplies, experienced the largest drop since the 1991 Gulf War on the night of 8 March.. (wikipedia)
2020 Corporate Debt Bubble
During the 2020 stock market crash that began the week of 9 March, bond prices unexpectedly moved in the same direction as stock prices. Bonds are generally considered safer than stocks, so confident investors will sell bonds to buy stocks and cautious investors will sell stocks to buy bonds. Along with the unexpected movement of bonds in concert with stocks, bond desks reported that it had become difficult to trade many different types of bonds, including municipal bonds, corporate bonds, and even U.S. Treasury bonds. The New York Times opined that this, coupled with the fall in gold futures, indicated that major investors were experiencing a cash crunch and were attempting to sell any asset they could. As big investors sought to sell, the spread between the prices sellers and buyers wanted has widened. As banks were unable to sell the bonds they were holding, they also stopped buying bonds. As the number of traders fell, the few trades remaining wildly swung the bond prices… (wikipedia)
On 19 March, the European Central Bank announced a 750 billion euro ($820 billion) bond-buying program, named the Pandemic Emergency Purchase Programme, to mitigate market turmoil. Unlike in previous ECB asset-purchases, Greek government bonds were included. Markets reacted positively, with the yield on Italian government bonds dropping to 1.542% from 2.5% the day before. ECB President Christine Lagarde stated, “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro.