Black Monday: Why cheap oil sent the world’s stock markets into a tailspin

Panic stalked the markets with traders’ screens showing a sea of red, writes James Moore

Crude oil prices have plummeted as global demand has eased and new supplies such as US shale oil have come on to the market (AP)

The economic black swan event that’s called Covid-19 might have found a mate. Flying in from the east comes an oil price shock courtesy of a row between Russia and Saudi Arabia.

The latter knocked 20 per cent off crude and contributed to an 8 per cent fall in value of the FTSE 100 upon the opening of trading.

While the index subsequently recovered a bit, it was still grappling with its worst single day since the financial crisis. The screens used by traders looked like a sellout crowd at Old Trafford in terms of colour.

At this point some people might be inclined to ask something like “shouldn’t cheap oil help the economy”?

They’re awful from the perspective of planet Earth and its capacity to sustain us all.

But they have, in the past, proven positive in the short to medium term when it comes to GDP and growth. The reverse is true of pricey oil.

Well, it’s complicated. Bear with me... there’s a lot to unpick here.

The background to this is the impending end of an agreement to cut production involving Russia and Opec, which created an opening for US shale producers. Frackers. They took full advantage, making Uncle Sam a net exporter of oil in the process.

A disagreement on how to proceed in the face of that has led to the Saudis and the Russians turning the taps on, threatening the profitability of the American producers.

Many of them are positively drowning in debt, which is what they used to get started.

Given that it costs them a lot more to get the stuff out of the ground than it does the Saudis, the word “ouch” comes to mind.

Prudent managers have hedging in place to help them deal with this, but not all managers are prudent. A clearout looms, which will also affect oil services companies, result in the loss of a lot of good, well-paying jobs.

At some point prices will move higher again, thus creating a fresh opportunity for the fracking fraternity and starting the cycle again. Did someone say rat race?

In the meantime, America’s energy economy will take a knock. So have some of the biggest stocks on the resource rich FTSE 100. Shell’s share buyback? Its dividend? And BP’s? All raise questions.

It bears repeating that the UK market is going to be particularly exposed to this sort of thing until we, or rather our fund managers, stop chasing short term bungs by selling off good growth companies on the cheap to all comers.

The FTSE, and our pensions (which rely on it), would benefit from a different approach and a little more investment choice and variety.

In the meantime, the oil shenanigans have simply served to add to a highly flammable mix of uncertainty created by the coronavirus and other nasties (you can include Brexit in that category), what with an important part of Italy on lock down and China’s economy heading into the refrigerator.

When the news broke it was a bit like throwing a lit match into the middle of a petrol station.

No one seems inclined to pick up their copy of The Hitchhikers Guide to the Galaxy, which famously bears the legend “Don’t Panic” in large, pink friendly letters and it’ll probably stay that way until the virus has blown through.

So get set for a bumpy ride. It’s great news for the gold price. PS, are you watching this as you put the finishing touches to your budget, Rishi Sunak?

Lower oil prices mean you’re going to get a lot less revenue from fuel duty. Now would therefore be a good time to increase the rate given the government in which you serve as chancellor is in fairly dire need of revenue.