The Dow Jones suffered its worst day yesterday since the financial crisis, as the index tanked over 2000 points . Two factors drove the price lower: Coronavirus fear and the failure of the oil supply cut by OPEC. Investors were hopeful that the cartel would introduce the biggest supply cut on record on Friday, to address the coronavirus concerns. However, Russia never agreed to a supply cut and therefore, we experienced one of the worst days in the Middle Eastern equity markets on Sunday. The European and US investors took this as a sign of panic and hence the global equity markets went bunker yesterday.
InvestorsAren’t Thinking Logically
The fact isthat investors aren’t thinking logically because there is no way that the oilwar is in anyone’s favour. It isn’t going to take place now. This is because,during the oil supply glut, we have seen not only the cartel suffering, butRussia and the US also got hit badly. Russia and the US need to understand onething very clearly, they cannot win the oil war with the Middle East especiallywith Saudi Arabia as its breakeven point is much lower than any other country.If Russia, which is the problem child right now, doesn’t throw in the towel, itwill be its oil companies that will be suffering the most. As for the marketparticipants, they are clearly thinking wrong; there is no way that we aregoing to see an oil supply war now. Markets sentiment is already on its kneesand it is no one’s favour to make matters worse.
LowerOil Price Is a Blessing
I think itis only a matter of time to see an announcement from OPEC+ about theiragreement on the oil price cut. Moreover, investors need to understand thatlower oil prices are good for the bigger picture. What I mean to say is, thatlower oil prices are likely to leave more money in consumer pockets and this isexactly what we need in the time of this fear. Thus, a lower oil price is notan event which investors should be fearful of, in fact, they should consider itas a blessing.
The RealMeaning of Panic
Having said this, if for any reason the oil cartel losses it’s head and the oil supply war takes shape, then it is the last thing that investors could think of because default rates for not only oil-producing companies would tick higher but also the companies which are involved in the oil refinery business. This process would create huge chaos and only then we will know the real meaning of panic
From a technical perspective, oil prices are presenting the biggest opportunity for investors. The crude oil trading price has dropped to a level that we have not seen since 2015. In other words., the price has entered an important area of support as shown in the chart below. It also shows the resistance zone—the take profit area.
Remember,crude oil price dropped nearly 30% yesterday and then it recovered nearly 6%,the biggest one-day drop since 1991 has a buy label all over it and investorsmust consider this carefully.
Investorsneed to calm their nerves and sperate noise from reality. We all know thatenergy companies are going to be adversely impacted due to coronavirus however,thinking of an oil supply war is beyond reason, for now. I do not see thisparticular situation playing out at all.
In myopinion, it is a good time to build some exposure in oil. It is important tokeep in mind that the oil price may continue to move lower due to bad economicnumbers—economic data is bound to show weak global economy—but I think oilsupply cut from cartel is likely to off-set the influence of coronavirus.