Markets opened this morning to the sharpest decline in oil prices since the Gulf War in 1991. Rumblings of the shock came over the weekend after Saudi Arabia announced plans to ramp up production and effectively kick off a price war with oil-producing powerhouse Russia.
"We’ve seen oil prices drop to a degree that we haven’t seen in literally 30 years," Lenore Hawkins, chief macro strategist for Tamatica Research, told Cheddar. "You put that on top of a global pandemic and it’s a tough day."
Saudia Arabia on Sunday announced that it would hike oil production to greater than 10 million barrels per day in April. As a member of OPEC, the world’s top exporter had been in talks with Russia to cut production to keep prices up as the coronavirus hammers markets.
When Russia signaled that it would not play along with the trade group, Saudia Arabia shot back with plans to boost output as well.
The supply shock is doubling up with a steep decline in demand due to the coronavirus outbreak, which has grounded airlines, quarantined millions, and sent markets reeling.
"We don’t know what the game plan is. There is no rulebook for this," Hawkins said.
She added that the likely goal of both Russia and Saudia Arabia is to put pressure on U.S. shale oil producers, who carry a considerable amount of debt and would benefit from higher prices.
"What Saudia Arabia is trying to do and what Russia is probably looking to do as well is drive those producers out of business," Hawkins said.
In addition to the oil shock, the Dow Jones Industrial Average dropped more than 1,900 points in early trading. The S&P 500 also plunged 7 percent, stoking fears that the crisis could spark a recession.
The drop triggered a 15-minute pause in trading shortly after the bell designed to give markets a breather and avoid panic-driven activity.
"Uncertainty is really what triggers volatility in the market," Stacy Cunningham, president of the New York Stock Exchange, told Cheddar. "Investors can usually price in impact if they know what that impact is, but when they’re not sure they tend to get a little more concerned."
For Hawkins, the dual hit from the supply-demand oil shock and the developing nature of the coronavirus outbreak has left investors with few precedents to act on.
"Investors are not going to calm down until we start to get our arms around this," Hawkins said.
She pointed to the latest news out of Italy that officials are sealing off the northern half of the country to prevent the further spread of the illness as an example of the massive uncertainty facing global markets.
President Donald Trump chimed in this morning with a rather different take on the situation.
"Good for the consumer, gasoline prices coming down!" Trump wrote on Twitter.
