Will Oil Pull Down The Stock Market?
Oil is in the bear.
Over the last week, prices saw further eradication as OPEC failed to reach an agreement. The oil market is experiencing a glut. With a slow down in the global economy, this was the case since the beginning of the year.
Since the outbreak of coronavirus, things in many areas came to a complete standstill. This is likely going to affect the economy even further.
On the year, oil is down 32% for WTI and 31% for Brent.
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Analysts are not very bullish. The expectation is that OPEC will step in to try and get deeper cuts but Russia's resistance really hinders any activity on the supply side.
Many are pointing to the $35 level as almost a given while some are pegging the drop into the mid $20s.
This could have a major impact on the markets. Oil employs a lot of people which could result in layoffs. The challenges is that this sector still has high paying jobs which would affect spending.
At the same time, the oil industry is carrying a lot of debt. Since it is a capital intensive business, it is hard to sustain it if revenues are hit. Slowdown in oil consumption along with a radically falling price makes servicing the debt next to impossible.
While it is not likely enough to devastate the credit markets, it could set the ball rolling if defaults start to escalate. Both 2020 and 2021 see a lot of debt coming due. In the present environment, it is unlikely that lenders are going to be willing to advance even more debt.
Here is how one analyst views the entire situation:
“Crude has become a bigger problem for markets than the coronavirus,” Adam Crisafulli, founder of Vital Knowledge, said Sunday. “It will be virtually impossible for the [S&P 500] to sustainably bounce if Brent continues to crater,” he added.
Crisafulli noted that oil is “critical” to the U.S. economy. Many people are employed by the industry, and highly leveraged oil and gas companies are key to the fixed income market.
“The sector is like the ‘FANG’ of credit, esp. high yield, given the enormous amount of debt it has outstanding,” he said.
https://www.cnbc.com/2020/03/08/oil-a-bigger-problem-for-markets-than-the-coronavirus-after-opec-deal-collapse.html
It is a very touchy situation. Even without the virus, the global economy is on soft footing. With oil dropping like a brick, is this telling us something? Traders have long known that there was between a 1-2 million BPD surplus. The virus is likely to expand this.
As much as OPEC tries to control things, there are too many other players. With the U.S Shale companies under so much debt, the last thing they are going to do is slow down production. They need to pump every drop they can to get their revenues going.
It is going to be a volatile ride for a while.
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