On Monday the market suffered its worst day since the financial crisis, with the FTSE ending the day down over 7%.
Covid-19, the coronavirus, is still at the heart of the turmoil, but an oil price crash has exacerbated the situation. This was brought about by Saudi Arabia threatening to aggressively slash prices and increase production in response to Russia turning down an OPEC suggested cut in oil production in a bid to maintain the oil price.
The Saudi-led proposed cuts in production were intended to support oil prices during a period of uncertainty surrounding the impact of the coronavirus on global economies. Whilst the ultimate impact of the coronavirus is still unknown, it is certainly having an economic impact in the short term – especially across tourism and travel as events are cancelled and people avoid crowds. Russia seemingly disagreed with the cuts with a spokesman for Russian Oil Company Rosneft saying that all OPEC cuts so far had been replaced by American Shale production thus not fulfilling their aim of maintaining prices.
Initiating an all-out price war is a big and somewhat risky gamble by the Saudis. It could not only bring the cooperation between OPEC members to an end, but also between OPEC and Russia. However, the biggest pain might be inflicted upon the US shale oil drillers. All in all, this is a big deflationary shock to the economy at a time of great uncertainty in light of the coronavirus outbreak. The situation may yet deteriorate further, but long term investors should feel confident that the economic threat posed by oil price volatility and the coronavirus should ultimately be transitory in nature.