Oil prices crash, COVID-19 fears spook global markets

Crude oil prices crash, coronavirus fears spook global markets

A steep drop in crude oil prices triggered by Saudi Arabia launching a price war with Russia and aggressively cutting its oil future rates, sent global stock markets into a tailspin on Monday. The biggest drop in crude rates in close to 30 years, did not spare even the Indian markets, already reeling under coronavirus fears.

Brent crude prices fell nearly 33% overnight, the steepest since the Gulf War of 1991. As the day broke, the rising coronavirus casualties deepened fears of its unbridled spread. Crude, however, recovered by around 10 percentage points by the end of the day to sell at $36 a barrel but panicked by the two events, world markets fell sharply.

Oil prices dropped when a three-year pact between the Organisation of Petroleum Exporting Countries (OPEC) and Russia ended on the weekend after Moscow refused deeper production cuts arguing that its economy depended on oil. Russia is the second largest producer of crude oil. The OPEC proposal of additional cuts of 1.5 million barrels a day envisaged a deeper cut by Russia, an outside OPEC member.

The oil price war between the two producers sent energy stocks across the globe falling. Exxon Mobile fell 14%, Saudi Aramco about 10% and S&P500 energy sector hit an 16-year low. Falling crude added to the concerns of global growth, hit already by virus fears and looming US recession. This led investors to withdraw money from financial markets and park in haven assets.

The benchmark 30-share Sensex witnessed its biggest single-day drop in terms of points, falling by over 1,942. Nifty too closed 538 points down. For India, an added fear was a question mark on the stability of its banks that weighed heavily on the markets. Domestic equities saw a heavy sell-off, investors lost Rs 6.8 lakh crore of wealth.

Generally, lower crude prices reduce India’s import bill, bring down inflation and give a boost to growth since the country is a net oil importer. But the situation now is different. Though crude prices are on a multi-year low, the rupee too has crashed, trading at a touching distance of an all-time low of 74.46 against the dollar. It closed 74.14 against the greenback on Monday.

A weaker rupee means India will have to pay more for buying the same amount of crude from overseas markets.

Traders, however, said if the oil prices remained subdued for a longer period, India could reap the benefit even if the rupee depreciated mildly.

The stocks of oil companies and banks were the worst hit. On BSE Sensex, ONGC was the biggest loser, with its shares tanking 17%, followed by Reliance 12.52% and IndusInd Bank 12.06%. The vicious sell-off in stocks led to investors parking their money in gold, whose prices ruled a seven-year high in the international market briefly. In India, gold prices remained elevated.

According to Madan Sabnavis, chief economist at CARE Ratings, “If the virus spreads, the RBI will definitely intervene and go for a rather big cut in interest rates, improving the market sentiment.” The European stocks fell more than 8%. In the US, trading halted temporarily as Dow Jones plummeted nearly 2,000 points.

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