The Dow Jones suffered its worst day yesterday since the financial crisis, as the index tanked over 2000 points yesterday. 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.
Investors Aren’t Thinking Logically
The fact is that investors aren’t thinking logically because there is no way that the oil war 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, but Russia and the US also got hit badly. Russia and the US need to understand one thing very clearly, they cannot win the oil war with the Middle East especially with 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, it will be its oil companies that will be suffering the most. As for the market participants, they are clearly thinking wrong; there is no way that we are going to see an oil supply war now. Markets sentiment is already on its knees and it is no one’s favour to make matters worse.
Lower Oil Price Is a Blessing
I think it is only a matter of time to see an announcement from OPEC+ about their agreement on the oil price cut. Moreover, investors need to understand that lower oil prices are good for the bigger picture. What I mean to say is, that lower oil prices are likely to leave more money in consumer pockets and this is exactly what we need in the time of this fear. Thus, a lower oil price is not an event which investors should be fearful of, in fact, they should consider it as a blessing.
The Real Meaning 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 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 investors must consider this carefully.
The Bottom Line
Investors need to calm their nerves and sperate noise from reality. We all know that energy 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 this particular situation playing out at all.
In my opinion, it is a good time to build some exposure in oil. It is important to keep in mind that the oil price may continue to move lower due to bad economic numbers—economic data is bound to show weak global economy—but I think oil supply cut from cartel is likely to off-set the influence of coronavirus.