finance current event

Jingjing Xu FINC 667.01 F20

Current Event Report: 2020 Russia–Saudi Arabia Oil Price War

Summary Since the Organization of the Petroleum Exporting Countries (OPEC) recently failed to reach a new agreement with Russia on limiting crude oil production. Then, Saudi Arabia, the world’s largest oil exporter, announced that it would lower its official oil prices, increase production from April and pursue more market share. The increasing supply of oil markets due to the oil price war and the weak demand due to the impact of the coronavirus pandemic made oil production encounter a double attack from the supply and demand side. Therefore, international oil prices plummeted in panic. In early March, U.S. oil prices fell by 34%, crude oil fell by 26%, and Brent crude oil fell by 24% (Wikipedia). Following the sharp rise in investor demand for hedging, the global stock market was volatile; especially the U.S. stock market triggered circuit breaker four times in ten days. At the same time, the international exchange rate market was unstable, and the oil futures market plummeted. The 2020 Russia-Saudi Arabia oil price war has affected not only the global economy but also the prestige of international organizations.

Reasons Low oil prices not only affect the trade cost accounting of energy exporting and importing countries, but also have complex effects on the overall economy. Under the background that almost all industrial chains are linked to finance and capital markets, the chaos of finance and capital markets will eventually affect the real economy industry and trigger a full- scale economic crisis. Understanding the 2020 Russia-Saudi Arabia oil price war can not only further understand the direct causes and specific circumstances of the 2020 stock market crash, but also help understand the trend of the global capital market. As one of the biggest events affecting the capital market in the first half of 2020, it is necessary to study and to understand.

Futures Market Data directly quotes from CNN Business news. Due to the negotiation broke down between Russia and Saudi Arabia, the global oil benchmark Brent crude oil futures fell 22% to $35.45 per barrel. And the US oil transaction price was US$33.15 per barrel, a drop of nearly 20%. The essence of the price oil war is that oil-producing countries increase production, and the current market demand for oil continues to decline, resulting in oversupply and falling prices. But this plunge directly increased the risk aversion awareness of the global market.

Stock Market Although the intensification of the COVID-19 pandemic is an indirect cause, the direct cause of the 2020 Stock Market Crash is still the Russia–Saudi Arabia oil price war. The plunge in crude oil will affect the stock market by affecting the oil industry and then the performance of

oil companies. Besides, increasing panic among investors makes the 2020 stock market crash inevitable. In the U.S. stock market, on March 9, the S&P 500 index opened sharply fall, and then the decline reached the upper limit of 7%, triggering a circuit breaker that halted trading for 15 minutes for the first time since 1997. The data at the Wall Street Journal - Market shows that the Dow Jones Industrial Average fell 7.79%, and the Nasdaq Composite Index fell 7.29%. In the next ten days, the U.S. stocks market triggered a circuit breaker four times, and the Dow Jones Index fell below 20,000 points, which experience the worst time since 2008. We are indeed witnessing the history of the stock market. In addition to the sharp decline in the U.S. stock market, the stock markets of other countries have also suffered. Searching the stock market data from Bloomberg, the three major European stock indexes fell across the board on March 9, including London’s FTSE 100 index (-7.7%), the CAC40 index of the Euronext Paris (-8.39%), and the DAX PERFORMANCE- INDEX of Frankfurt stock market (-7.94%). Historical stock market data searched from Trading Economics. In the Middle East market, the stock price of Saudi National Petroleum Corporation plummeted, causing the Saudi stock market to fall sharply for the second consecutive trading day. Tadawul All Share Index (Saudi Arabic stock exchange) declined more than 7%. The Qatar stock market decreased by more than 9%. The Egyptian stock market also fell by more than 7%. Information received from Nasdaq News. The stock market in Sao Paulo, a vital oil- producing country in Latin America, plunged more than 10% after the opening on March 9, triggering the circuit breaker mechanism. The Sao Paulo Stock Exchange index closed down 12.17%, which became the most significant one-day drop since September 10, 1998. Petrobras' share price with a reduction of nearly 30%, which was the most lost one. The S&P MERVAL Index of the Buenos Aires stock market plunged 13.75%. Data searched from Bloomberg Market. Asia-Pacific stock markets also experienced a vast downturn on March 9. The Sydney stock market S&P/ASX200 index descended the most with 7.33%, followed by the FTSE Straits Times Index (Singapore stock market) 6.03%. Besides, the Tokyo stock exchange market index fell 5.61%, and the Seoul Stock Exchange Composite Index fell 4.19%. The failure of an oil price negotiation has brought about considerable changes in oil market prices, and the direct visible impact is the global stock market. Because of the announcement of the oil price war, global stock markets have plummeted, and stock markets in many regions have fallen at a record since the 2008 subprime mortgage crisis. From the above data, it can be seen that for countries that rely on energy production, such as Brazil, Saudi Arabia, and other countries, the stock index has fallen more sharply. The COVID-19 pandemic has directly impacted the profitability of the energy and financial sectors. The impact of the epidemic on social production and life, from industrial production to consumer goods expenditure, has led to a decline in demand. The outbreak of oil price wars among major oil countries has directly hit international oil prices, which has a direct impact on the yield and solvency of the U.S. crude oil and shale oil industry chain. The epidemic and the oil war have exacerbated people’s panic about market instability. At the same time, measures such as interest rate cuts taken by central banks in the face of financial market turmoil

will also put pressure on the profitability of banks and other financial institutions, further causing the overall trend of the stock market to decline. Therefore, on March 9 it is defined as Black Monday in 2020.

Foreign Exchange Market Market views, people’s psychological expectations, and political and economic conditions are usually the direct causes of exchange rates. With the beginning of the oil war and the increasing of panic, the global foreign exchange market has also fluctuated. Safe-haven currencies such as the Euro, Yen and Swiss franc rose sharply, pushing the dollar index, which measures the dollar against six major currencies, to fall by more than 1% (MarketWatch). The currencies of some oil-producing countries that are more affected by oil prices have dropped sharply against the US dollar. For example, the Brazilian currency real has fallen sharply against the US dollar. Although the Brazilian Central Bank has made a lot of efforts to intervene in the exchange rate market, it still cannot prevent the rapid decline in the real exchange rate. 　　 As one of the protagonists of the oil war, Russia’s ruble exchange rate against the U.S. dollar and the euro fell rapidly. On March 9th, the ruble-to-dollar exchange rate fell to 75 rubles per dollar, marking the biggest fall since the 1991 Gulf War (FocusEconomics, 2020). The Russian Central Bank also announced on the same day that it would ban the purchase of foreign exchange in the Russian domestic market within 30 days to stabilize the financial foreign exchange market (XINHUANET, 2020).

Economies In the context of the COVID-19 intensifying global economic instability and fluctuations in oil prices will cause continued turbulence in global capital markets and global economy. Low oil prices are undoubtedly a disaster for oil producing countries. Low oil prices are not only harmful to the economies of Russia and Saudi Arabia, but also to the oil revenues of other oil- producing countries. Meanwhile, it will exacerbate the risks and political instability of the Middle East energy economy. The US economy cannot avoid being affected. Although the shale oil production capacity in the United States has grown steadily, the development cost of shale oil is relatively high. Therefore, Jorge Guira mentioned at the Conversation that a barrel of shale oil needs to be above US$50 to reach breakeven. The low oil prices brought about by the 2020 oil price war will directly lead to a reduction in the income of US oil industry workers, an increase in costs, and a reduction in domestic demand, which will cause a significant blow to the US economy. I am agree with the World Oil magazine who commented on the post-price war American shale oil: “Shale oil production may take years to recover, despite a short-term uptick.”

Organizations Inquiring about the history of oil price wars, we can realize that the 2020 oil price war is not the first time that the game between major oil-producing countries has played. The most recent one happened in 2014. Although there was downward pressure on oil prices, oil-producing countries insisted on not reducing production. So, Saudi Arabia also refused persistently to

reduce production to maintain oil prices. Instead, Saudi Arabia began to increase production to seize market share. As a result, oil prices plummeted with a drop of two-thirds. As we all know, the primary purpose of the establishment of the Organization of Petroleum Exporting Countries (OPEC) is to ensure the stability of oil prices in the international oil market by eliminating unnecessary price fluctuations. After all, oil prices are the economic backbone of many oil-producing countries. If prices drop sharply, they will quickly have a massive impact on the national economy. For example, Venezuela experienced economic collapse and currency devaluation after the oil price war in 2014. However, in the 2020 Russia- Saudi Arabia oil price war, OPEC also failed to play a critical role. Besides, in 2020, the coronavirus pandemic will sweep the world, and the ability of the World Health Organization (WHO) has been widely questioned. Because of successive international events, the trust of various countries in different international organizations may decline, which is not conducive to the cooperation of multiple countries in different fields in the future.

Conclusion The result of the 2020 Russia-Saudi Arabia oil price war is that the two countries agree to oil production cuts after negotiation in April and June. But the oil price war already hit the global economy. Due to the COVID-19 pandemic and oil price war, the global economy is currently in a weak state. However, we should believe that after the epidemic and new agreement, oil price supply and demand will recover, financial markets will pick up, and people's lives will return to normal.

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