• Global markets plunge as oil prices slide 30%
  • U.S markets open down as low as 7%
  • Circuit breakers triggered at NYSE as selloff intensifies

Global markets plunged Monday morning as crude oil prices tumbled more than 30% on news that the OPEC+ alliance that had kept global oil production contained is falling apart. Russia, a key player on OPEC+, and Saudi Arabia, OPEC's biggest member, have very different ideas of how to stem falling prices, and that could lead to nothing less than a reshaping of the global economy.

The DJIA dropped more than 7% at the market open, falling more than 1800 points. Circuit breakers were triggered at the NYSE, halting trading for 15 minutes. If the market falls 20% in the session, the NYSE will close for the day. The S&P500 and the Nasdaq fell just under 7%, and volatility soared as traders moved in and out of stocks.

The yield on the U.S. 10-year treasury has fallen as low as 0.31%, and that of the 30-year fell below 0.9%, taking the whole U.S. yield curve below 1% for the first time....ever. European markets, already in a steep correction, fell the most since 2016. Italy has effectively quarantined one third of its population to stem the coronavirus outbreak, which has infected more than 109,000 people worldwide, killing more than 3,800. Here in New York we are being told to avoid the subways during rush hour. 

Governments around the world are planning emergency stimulus measures to halt what looks like could be an inevitable slide into a recession. The sell off in stocks today is likely to trigger circuit breakers to stem the losses.

Shares of Apple (AAPL) slid 7% in early trading as the company said it sold fewer than 500,000 iPhones in China in February, far lower than forecast.

OPEC+ Alliance Fractured

Saudi Arabia has slashed oil prices after Russia refused to participate in more steep production cuts on Friday. This marks the end of a 3-year energy alliance between OPEC and the second-largest oil producer in the world. An escalating price war among producers is now expected, and oil prices crashed 30% in response on Monday. Shares in U.S. companies like Occidental Petroleum, Marathon Oil and ConocoPhillips are all crashing in pre-market trading.

 The current OPEC+ pact to cut 1.7 million bpd ends in April. According to reports, the state-owned Saudi Aramco plans to flood the market by boosting output once it expires. According to Reuters' sources, April’s production will be significantly higher than 10 million bpd, possibly closer to 11 million bpd. Its output is currently at 9.7 million bpd. 

courtesy YCharts
courtesy YCharts.

Whether this is a move to protect its market share or punish Russia is unclear, but there's no doubt it will be painful for the oil-dependent kingdom as well. Shares in Saudi Aramco have fallen below its IPO price as investors expect a hit to earnings. This will also be a big test for the U.S. shale industry, probably one of the reasons the Kremlin rejected cutting output in the first place. Remember, the U.S. last month imposed sanctions against the trading arm of Russia's Rosneft. North American oil and gas producers have $86 billion of rated debt maturing in the next four years, according to Moody’s Investors Service, and falling prices will make it harder for them to borrow. Winners of this latest development will be customers (if governments pass down the benefit), refiners and the struggling airline industry.

This is all playing out against the backdrop of the coronavirus outbreak, which was the reason for Saudi Arabia proposing cuts in the first place and is looking more like a pandemic as time goes on. The demand for oil is expected to fall sharply this year. On Sunday, Goldman analysts warned that Brent crude prices could dip to as much as $20 a barrel. "This (price war) completely changes the outlook for the oil and gas markets, in our view, and brings back the playbook of the ‘New Oil Order,’ with low-cost producers increasing supply from their spare capacity to force higher cost producers to reduce output," said the note.