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Oil price plunge triggers stock market freefall

By Lawrence Gash

Covid-19 uncertainty continues to ravage global markets

Prince Abdulaziz bin Salman Al-Saud, Saudi Arabia's minister of energy

Stock market indices fell dramatically at the start of Monday trading following Saudi Arabia’s decision to flood the oil market. This brought oil prices to their lowest point in four years.

The coronavirus outbreak, which contributed to Saudi Arabia's action, has continued to spread throughout Europe, Asia, North America and Africa.

Both Brent and West Texas Intermediate (WTI) crude futures have suffered their largest plunge since the first Gulf War in 1991. By mid-morning trading Brent stood at $36.49 per barrel, down 19.39 per cent, while WTI has dropped 20.76 per cent to stand at $32.71.

Asian markets were the first to react to Sunday’s development. By the close of trading the Shanghai Composite index suffered a 3.01 per cent fall, while Hong Kong’s Hang Seng index dropped 4.23 per cent and Japan’s Nikkei 225 closed down 5.07 per cent.

Australia’s S&P/ASX 200 index suffered its largest plunge since the global financial crisis of 2008, falling 7.3 per cent.

The UK’s FTSE 100 was also headed for its worst day since 2008 when it fell 8.5 per cent at the start of trading. By mid-morning trading however, the index stood at 6099.94 per cent, a fall of 5.61 per cent.

Oil companies have been some of the index’s biggest losers, with Shell falling 14.53 per cent to 1,363.80 pence and BP suffering a 17.70 per cent drop to stand at 324.75 pence.

Many European indices have fared even worse at the start of the week’s trading. While Germany’s DAX has fallen by a similar 5.65 per cent, France’s Cac 40 has dropped by 6.18 per cent.

Italy is still the worst affected. Over the weekend the government announced a mandatory quarantine for the 16 million citizens in the Lombardy region. More than 7,000 cases have now been confirmed in the country with 366 deaths.

On top of the oil price shock mainland Europe is seeing a marked increase in confirmed coronavirus cases.

The Lombardy region includes Italy’s financial hub, Milan, and much of the country’s key industries. At the time of writing Italy’s FTSE MIB index had fallen 9.43 per cent, suffering a near 2,000-point drop.

Saudi Arabia’s decision to flood the oil market came after Russia refused to sign a proposal put forward by the Organisation for the Petroleum Exporting Countries (OPEC). The Kingdom had been pushing for a 1.5 million barrel per day reduction in oil output and for an extension to the existing 2.1 million bpd cuts agreed in 2019.

The Covid-19 crisis has severely reduced demand from around the world, but particularly from China.

Russia, which had been allied to the consortium for over three years, was reluctant to agree to further cuts. It believed these would only strengthen Saudi Arabia and its close ally the United States.

Following president Vladimir Putin’s refusal Saudi Arabia slashed its oil prices, putting pressure on Russia.

A former executive vice president of the state-backed energy behemoth Saudi Aramco, Sadad al-Husseini, told The Times: “Saudi Arabia is protecting its market position in the face of a collapse in oil demand, a shrinking physical market and greatly reduced prices.”

In Saudi afternoon trading Aramco stood at 28.25 SAR, a fall of 5.83 per cent.

Over the weekend the ruling Crown Prince Mohammed Bin Salman arrested the brother and nephew of King Salman, accusing them of treason and organising a coup.

FURTHER READING: Oil sinks to multi-year low as OPEC deal hangs in the balance

FURTHER READING: ‘Bond King’ predicts gold surge

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