Effects of the Oil Price War on the Stock Market

Following the report of the oil price war, quite a number of index tracking-funds that can be traded on the stock market have been greatly exposed to volatility in the oil and energy sectors. This is in addition to the already existing market volatility caused by the coronavirus outbreak. As a result of this, JKO’s S&P GSCI Brent Crude ETF lost 41.38% of its value within the last two trading days while Australia’s OOO AU crude oil index dropped 32.5%. Several other ETFs tracking the S&P GSCI index have plunged between 20% to 30%.

The global markets, particularly stock markets, have been in a ruckus since the oil price war of early hours.  Major US indexes, all recorded a drop with the Dow Jones Industrial Average down 1,551 points, or 6.1% and the S&P 500 down 5.5%, making it the worst day since 2008. The Asian stock markets also plunged with Japan’s Nikkei 225 dropping 5.7% and Hong Kong’s Hang Seng index down 4%. Australia’s S&P/ASX 200 also dropped 5.8%.

At about 9:34 am on Monday, trading was paused for 15 minutes to reopen at 9:49 am ET. The morning trade was filled with a rollercoaster of prices as the S&P 500 was down by 7% at some point, and the 30-stock Dow falling by 2,000 points.

Only on Sunday evening, the US futures and the Asian stock markets tumbled after a sharp drop in crude prices, thus, rattling investors who were already uncertain about the state of the stock market due to the Covid-19 impact. Global markets have since remained in this uncertain state and definitely not ready to take up any more pressure. 

Some analysts believe that the oil prices war may have some implications on the financial markets. According to Vaus Menon, senior investment strategist at OCBC Bank Wealth Management, Singapore, “The implication for financial markets is that there could be some liquidation in more profitable positions just to cover the losses in oil markets. Oil markets have added just another layer of uncertainty but what’s more important at this juncture is COVID-19.” 

He also had this to say about trading at this time for investors who may be quick to jump at this “opportunity”, “This is not the best time to buy on dips. The macro picture is still very uncertain, things are still playing out and infection numbers in the West are still rising. Against these sort of headwinds, it’ll be foolhardy for investors to really jump in.” 

Yet, market experts like Adam Crisafulli, founder of Vital Knowledge, believe that the plummeting crude and oil prices should not be taken likely, after he said on Sunday that, “Crude has become a bigger problem for markets than the coronavirus.” A majority of this concern is focused on Brent crude oil as its oil prices have only dropped even more. “It will be virtually impossible for the S&P500 to sustainably bounce if Brent continues to crater,” he further added.

Since the oil price war, which officially started Monday, Brent crude futures plunged 29.07% to $32.11 a barrel after plunging 30% earlier. The US West Texas Intermediate crude futures aso dropped 30.98% to $28.49 a barrel, its worst day since 1991. In addition to this, the index that tracks the energy sector, the Energy Select Sector SPDR Fund (XLE) plummeted 15%.