20 ★ Tuesday10 March 2020
Bill Farren-Price
Markets Insight
The S&P 500 index was heading for its
biggest daily fall since 2011 by mid-
morning as energy stocks plunged in
tandem with oil prices.
About a fifth of index members hit 52-
week lows with fallers outnumbering
gainers by about 20 to one.
Diamondback Energy, the US shale
explorer, was the sharpest faller after
announcing plans to idle rigs.
Apache,Marathon Oil,Noble Energy
andHess lso slumped as analysts ata
Bank of America and SunTrust slashed
2020 earnings forecasts across the sector
by around two-thirds.
ButCabot Oil & Gas as anw
outperformer with investors switching
into natural gas prospectors on the hope
that a slowdown in US drilling activity
would help put a floor under gas prices.
Oil services groupSchlumberger lids
after Bank of America took the stock off
its “buy” list on fears of a dividend cut.
Royal Caribbean Cruises as weakestw
among the travel stocks after the US
State Department advised citizens,
particularly those with underlying health
issues, not to travel by cruise ship.
Twitter ose after announcing a peacer
treaty withElliott Management hat willt
see the website spending $2bn on a share
buyback.Bryce Elder
Wall Street Eurozone London
The oil price freefall and cascading
coronavirus risks tipped European stocks
into a bear market.
The Stoxx Europe 600 and Stoxx
Europe 50, along with benchmarks for
Germany and France, all closed 20 per
cent or more below their recent highs.
The Stoxx 600’s 7.4 per cent decline
was its sharpest daily fall since 2008.
Energy stocks and oilfield engineers
such asAker BP,TGS-Nopec,
TechnipFMC nda Lundin Petroleum edl
the slide as investors questioned whether
their balance sheets were strong enough
to cope if upstream investment
evaporates.
Vopak, the Dutch tank storage
operator, was the sector’s sole gainer on
hopes that lower oil prices would
translate into greater storage demand.
Société Générale as weakest amongw
the banks, which were rattled by another
drop in sovereign debt yields and worries
about their credit exposures to the oil
and gas industries.
AB InBev lipped after Credit Suisses
turned cautious, saying the brewer’s debt
remained at “uncomfortable levels”.
Worries aboutCasino’s planned sale of
its Leader Price chain and debt reduction
plan sentRallye, the French retailer’s
parent company, sliding.Bryce ElderBP nda Royal Dutch Shell ed the blue-l
chip fallers as the oil rout led UK stocks to
their worst day in more than a decade.
The FTSE 100 dropped 7.7 per cent, its
fifth biggest daily decline on record.
Premier Oil ore than halved onm
expectations that shareholders would
vote against a rights issue needed to
fund its $500m acquisition of North Sea
assets from BP, forcing the explorer to
seek covenant waivers from its lenders.
Tullow Oil,Energean Oil & Gas nda
Cairn Energy ere also hit as analystsw
said they would need to takeaction to
preserve balance sheet strength.
William Hill eld steady after the Doneh
brothers, owners of rival bookmaker
Betfred, disclosed a 3.03 per cent stake,
having crossed through a disclosure
threshold last week.
Cineworld aded even after its biggestf
shareholder,Global City Theatres, sold a
stake of about 8 per cent and refinanced
a margin loan facility to delink it from the
cinema operator’s share price.
Analysts welcomed the news as
removing an overhang for the stock.
Ryanair as among the more resilientw
of the airline stocks as the promise of
cheaper fuel combined with the effects of
an upgradefrom Credit Suisse, which
forecast an industry shakeout.Bryce Elder3 Retreating energy stocks weigh on
Wall Street and European bourses
3 Saudi price war triggers biggest one-
day drop in oil since 1991 Gulf war
3 Yields on US and German government
bonds hit record lows
Global stocks tumbled yesterday after
plummeting oil prices spooked investors
already jittery about the economic fallout
from the coronavirus.
The FTSE All-World index sank more
than 6 per cent following Saudi Arabia’s
decision over the weekend to start a price
war with its rivals by swamping the
market with oil.
The price of crude at one point fell
more than 30 per cent — the biggest
one-day drop since the Gulf war in 1991
— with Brent, the international
benchmark, hitting $31 a barrel. WTI, the
US marker, touched a low of $27 a barrel.
Russia’s rejection of Opec’s request to
make deeper cuts to global oil production
sparked the dispute that some analysts
say may become protracted.
“We fear that it could be a... struggle
as Russia’s strategy seems to be targeting
not simply US shale companies — but the
coercive sanctions policy that American
energy abundance has enabled,” said
Helima Croft, head of global commodity
strategy at RBC Capital Markets.
“The prognosis for the oil market is
even more dire than in November 2014
when such a price war last started as it
comes to a head with the significant
collapse in oil demand due to the
coronavirus,” said Damien Courvalin,
senior commodity strategist at Goldman
Sachs.
The crash in crude heaped pressure on
oil companies already reeling from
reduced demand for crude owing to the
coronavirus. Europe’s oil and gas sector
nosedived more than 15 per cent
yesterday, lagging the 7 per cent slide in
the broader Stoxx Europe 600 index.
Italian stocks fell more than 11 per cent
after Rome began to enforce a lockdownof northern regions in a bid to contain the
coronavirus. The number of cases in Italy
has risen above 7,000 with 366 deaths.
The worst-performing sector on Wall
Street was also energy, down more than
17 per cent by midday. The S&P 500 fell 6
per cent while the tech-heavy Nasdaq
Composite dropped more than 5 per cent.
However, bonds found buyers as
investors moved to haven assets. Yields
on US and German 10-year bonds both
hit record lows with the benchmark
Treasury falling to 0.32 per cent while the
Bund hit minus 0.91 per cent.Ray DouglasWhat you need to know
Plummeting oil prices hit energy companies
Stoxx Europe Oil & Gas indexSource: Refinitiv Oct Mar The day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2826.27 1323.72 19698.76 5965.77 2943.29 89087.
% change on day -4.92 -7.59 -5.07 -7.69 -3.01 -9.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 95.232 1.142 102.545 1.310 6.951 4.
% change on day -0.749 0.973 -2.658 0.537 0.157 2.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.515 -0.859 -0.148 0.154 2.569 6.
Basis point change on day -22.250 -14.600 0.240 -7.800 -14.300 17.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 318.81 35.95 32.71 1683.65 17.48 2602.
% change on day -6.14 -20.99 -21.26 1.45 1.63 -1.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.
Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index| |||||| ||||||||| ||||
Jan 2020 Mar2560288032003520| |||||||||||||||||||
Jan 2020 Mar1280144016001760| ||||| |||||||| ||||||
Jan 2020 Mar5760640070407680Biggest movers
% US Eurozone UK
UpsCabot Oil & Gas 11.
Autozone 4.
Twitter 3.
Dollar Tree 3.
H&r Block 2.Vopak 3.
Colruyt -0.
Man -0.
Yara Int -0.
Grifols -1.Polymetal Int 0.
Nmc Health 0.
Tesco -0.
Easyjet -2.
Hikma Pharmaceuticals -2.
%
DownsDiamondback Energy -46.
Apache -42.
Marathon Oil -40.
Noble Energy -36.
Halliburton -35.
Prices taken at 17:00 GMTSeadrill -23.
Saipem -21.
Tenaris -21.
Eni -20.
Natixis -17.
Based on the constituents of the FTSE Eurofirst 300 EurozoneBp -19.
Royal Dutch Shell -18.
Royal Dutch Shell -17.
Centrica -17.
Aveva -17.
All data provided by Morningstar unless otherwise noted.L
ast week’s Opec meeting with
Russia in Vienna was not
expected to be a walk in the
park because these get-to-
gethers never are. But what
started as another attempt to keep bar-
rels off the market to reflect the loss of
demand due to the coronavirus crisis
hasachievedpreciselytheopposite.
In one of the biggest ever pivots in the
behaviour of oil producers, a failure to
agree new cuts led to a breakdown in
talks and a decision to end all supply
restrictions, thus flooding the market
withoil.
Brent’s 30 per cent decline as trading
started this week will have been viewed
withhorrorinOpecoilministries.
The cartel’s failure of diplomacy
means that more oil supply will be hit-
ting markets just as the coronavirus
underminesdemand.
Saudi Arabia has clearly indicated
that, while it does not believe it started
the fight, it intends to win it. The surge
in oil production that is likely coming is
a recipe for collapsing oil prices that will
in turn undermine the stability of oil-
producingeconomies.
It was Moscow that prompted the
volte face. Since it started co-operating
with Opec in 2016, Russia has always
played hardball, winning concessions
for its oil companies and contributing
only nominal amounts to collective cuts
in output, despite being the
second-largestoilproducer.
In strategic terms, the Kremlin and
Russianfirmshavealwaysfocusedmore
on market share, or volumes sold, than
price — even though they, like Opec pro-
ducers, have benefited from higher oil
pricesduringtheyearsofco-operation.
But last week the Russians realised
something that has also been haunting
oil officials in Saudi Arabia — that theunintended consequence of output cuts
has been the higher prices that have
kepttheUSshaleoilexplosionontrack.
Russia could see US oil exports hurt-
ing its own markets in Europe and the
Mediterranean as well as the much-cov-
eted,highergrowthmarketsinAsia.
Moscow decided that now was the
time to strike, aware that US oil produc-
ers required high oil prices to remain
going concerns and observing a general
reluctance on Wall Street to put further
investment into many of these expand-
ingbutdividend-freeenterprises.
By ending output cuts, prompting
Saudi Arabia and Opec to do the same,Russiahaseffectivelysentitstanksonto
theWhiteHouselawn.
US oil output increased by 3.4m bar-
rels a day in the three years to 2019 but
this growth will now come to a shudder-
ing halt. By plunging the US oil patch
into heavy losses that will spark a wave
of bankruptcies and consolidation,
Moscow has taken aim at President
Donald Trump’s much-vaunted “US
energy independence”. This is an
economic smash-and-grab and a monu-
mentaltakedownofUSprestige.
As for Saudi Arabia, the kingdom will
have another go at prioritising market
share over price, as it did in late 2014,
when veteran former oil minister Ali
al-Naimi opted for a similar strategy.
But how long can it survive with Brent
crudeat$30abarrelorlower?
Saudi budgets require oil close to $to balance. Riyadh can meet its funding
requirements by dipping in to reserves
and by issuing debt but this is not sus-
tainableoverthelongterm.
With political and social pressures
always bubbling beneath the surface, at
some point the kingdom will have to cut
itscoataccordingtoitscloth.
What about Opec? As in 2014, it has
taken its hand off the tiller. Already the
group had just a dwindling band of
countries able and willing to restrain oil
production. Many of them have seen
collapses in oil output due to sanctions
(Iran and Venezuela), civil war (Libya),
weakgovernanceandsecurity(Nigeria)
andover-pumpedgeology(Angola).
Over the past year this coalition of
cutters had effectively shrunk to com-
prise Saudi Arabia and its Gulf allies,
Kuwait and the UAE. Iraq, much to the
frustration of others within the group,
has continued to expand its oil sector
and production capacity in defiance of
theOpecagreementsithasmade.
From a game theory perspective, this
moment was always going to come. The
prospect of plateauing global oil
demand and then retreat in the face of
competing green energy alternatives
hasbeenonthehorizonforsometime.
But the inevitable response from
Opec and Russia was not expected to
sparksuchapricevortexsosoon.
Having started down this path, it will
be difficult if not impossible for Opec to
walk back. It can also bid farewell to the
fractious alliance it had built with Rus-
sia and others. Oil is far from finished —
the global economy still consumes
nearly 100m barrels a day. But it is now
enteringunchartedwaters.Bill Farren-Price is a director at RS Energy
Group and a longtime attendee of Opec
meetingsRussia sends tanks
on to Trump’s lawn as
Opec diplomacy fails
Moscow has taken aim at
President Donald Trump’s
much-vaunted ‘USenergy independence’
MARCH 10 2020 Section:Markets Time: 9/3/2020- 18:31 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR, 20, 1