Investors now controlled by fear, not reason, says FXTM: File Image/PixaBay
The drastic decrease in new coronavirus infections in China compared to the perhaps inevitable increase in North America was no solace to either Wall Street or crude traders on Monday, and Saudi Arabia exacerbating the situation by reiterating its vow to flood the collapsing market with record output caused Brent to settle down $3.80 at $30.05 per barrel.
West Texas Intermediate fell $3.03 to end at $28.70 per barrel.
As calamitous as these figures undoubtedly are, it’s worthwhile noting that they were recently breached before: in January and February of 2016, respectively.
The last time there was a global surplus of this magnitude was never
Jim Burkhard, IHS Markit
While cooler heads in financial circles were already anticipating an economic rebound later in 2020 as the coronavirus runs its course in the Americas, the Saudis’ output tactics – designed to wrestle more market share at the expense of Russia – are a deliberate impediment to business development overall, with crude oversupply potentially reaching 800 million to 1.3 billion barrels, according to IHS Markit.
Jim Burkhard, vice president and head of oil markets at IHS Markit, remarked, “The last time there was a global surplus of this magnitude was never: prior to this, the largest six-month global surplus this century was 360 million barrels.
“What is coming will be twice that or more.”
The U.S. will reportedly begin purchasing domestically produced crude oil for the Strategic Petroleum Reserve several weeks from now, but Energy Aspects pointed out that this would not significantly offset the global drop in demand or inventory levels.
The ongoing Saudi price war means that only a handful of the hundreds of U.S. shale firms (most of which budgeted for oil between $55 per barrel and $65 per barrel in 2020) can profit from their newest wells, according to data provided by Rystad Energy.
Rystad estimates that only 16 U.S. shale companies, including Chevron Corp, Devon Energy Corp, and EOG Resources, operate in fields where the average new well costs are below $35 per barrel.
As for the immediate reaction by traders to the coronavirus, fear now seems to be growing quicker than the virus’s infection rate.
Hussein Sayed, chief market strategist at FXTM, noted that with regards to major financial institutions cutting its rates to record lows in order to combat the economic fallout, “It’s becoming evident that the major central banks across the globe are using all their available tools to prevent a crisis, but it seems the fear of the pandemic is taking control of investors.”