Oil Price War Amid Covid-19 Anxiety: A Common Sense Roller Coaster for Investors

"We are witnessing unprecedented times" sounds as cliché as "this is the next Google." However, the latest evolution in financial markets confirms that it is not an understatement. The financial markets seem to reflect our collective anticipation of the future and can ultimately trigger the very macroeconomic events expected and feared to happen.

In early January, we observed a stable stock increase. At the end of January and at the beginning of February, the market dropped the first time as a reaction to the Covid-19 outbreak in China and factory quarantines in South-East Asia. Soon enough, investors gained perspective, and dropping stock indexes stabilized until the week of February 24 and an outbreak in Italy. As the markets showed signs of rebound, an outbreak in the US increased general levels of fears to what many call "panic, exaggeration, or even dumb behavior."

 

Chart source: https://tradingeconomics.com/

Media, in response to criticism of heavily instilling fears, hesitantly expanded on rational, voice-of-reason or solution-proposing articles, and officials rushed to demonstrate their readiness to serve. Markets responded with a rebound. Then, an unforeseen punch surfaced from a blindside: Russia and Saudi Arabia begun the oil price war.

Oil futures dropped 25% over the weekend, and markets fell nearly 8% on Monday, Wall Street took few breaks on Monday during trading.

We may ask: why Russia and Saudi Arabia, and what is the relation to the new virus and risk of an epidemic? This event demonstrates how interrelated the current world is. The financial impact of the Covid-19 outbreak pushed oil prices down. With a vision to stabilize the oil price markets, Saudi Arabia announced a plan to lower oil production and requested Russia to join the efforts. Instead, Russia countered with a production increase and a statement that Russia will maximize the production as of April 2020. In contradiction to its original proposition, Saudi Arabia then shared its plans to do the same: increase production levels to the maximum and push the prices down to the minimum. It will, in return, hurt the Russian economy. The reason behind this is to pressure Russia into taking a reasonable approach to much-needed oil production controls.

Without exaggeration, the effects of current turbulences will be seen across the world for years to come. Many economists are convinced that the sell-off on markets will continue, and the crisis will worsen in the upcoming two months. Many others believe that we can still overcome the current situation without a recession.

The main areas that are immediately impacted are tourism and air freight transportation; these two are typically the first industries influenced by an economic crisis. Lots of companies started to feel the aftermath of Chinese manufacturing quarantine. It's a precious lesson learned emphasizing the importance of diverse supply chains and strategic sourcing processes in place. The resolution of oil price war and stabilization of production levels and price policy is going to be the trickiest to achieve. Low oil prices will harm the economies of oil-producing countries, the global economy, and will require significant diplomatic efforts to find a solution.

Contributor: Natalie Brandlova 

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