Oil prices have been plunging for eight weeks in the last nine weeks. The oil market has been very volatile amid the coronavirus pandemic. For the first time, crude oil prices in the US have plummeted into negative territory. West Texas Intermediate traded at -$40.32 a barrel on Monday 20th, April.
The fall has been attributed to the virus outbreak, which has made governments to impose lockdowns worldwide.
Markets are, therefore, flooding with oil, thus the reduced prices. Low oil prices have affected markets across the globe, including the stock market, which has been experiencing ripples. Forex traders are careful not to risk their basic forex bankroll in the already volatile forex market.
Why Are Prices Low?
Since governments started imposing lockdowns and social distancing, people have ditched the roads and their cars as they work from home.
Flights have been canceled all over the world. The transport industry, which consumes a significant amount of oil, has therefore reduced the demand.
Additionally, most industries that rely on oil as fuel have also closed down. Consequently, there’s a flood in the oil market and low demand, thus the low prices.
Whether and when it will recover may depend on how long it takes to come up with a vaccine for coronavirus.
The Organization of the Petroleum Exporting countries (OPEC) and other producers like Russia, forming OPEC+ has agreed to cut production to 9.7 million barrels per day starting from May.
Though this is a good idea, it may not actually offset the overproduction to equal the demand as it is only a cut of approximately 10%.
However, other producers like Kuwait have announced, through the state news agency, KUNA, that they’ll cut oil supplies to their international markets from now instead of waiting for the official start in May.
How Are Low Oil Prices Affecting the Stock Market?
The low oil prices are causing a fall in the shares belonging to the oil industry dragging down the whole market as a result.
Major players like Chevron (News - Alert) and Exxon Mobil have seen their shares fall significantly. Banks, who are the major lenders to oil companies, have also experienced the falling of their shares.
On Tuesday, April 21st, S & P 500 dropped 86 points while Dow Jones saw its steepest fall in a day since 1987. Shares for companies in the travel and tourism sector, which has been hit the most, have also plummeted as most of them have ceased operations.
Most investors are also not willing to risk their stock investments. Therefore, the market has been experiencing major exits as investors turn to less volatile options.
Other Markets
- Other commodities such as gold, copper, zinc, and overall metal prices have fallen.
- Credit markets are now volatile as treasury yields reach historic lows.
- Central banks and governments in the world are implementing policy actions such as reducing rates in a bid to save the economy.
In a Nutshell
Low oil prices are usually seen as a benefit to the economy since the consumer will spare some money which they can spend on other things.
This time though, the prices are attributed to the slow growth of the economy. This has affected financial markets, which has seen prices of shares go down, and investors exiting the market.
