Black Gold and its great fall!

Crude Oil or ‘Black Gold’ is one of the vital non-renewable fossil fuels and a major energy source of the modern world. Crude oil prices are denominated in terms of the most strongest and stable currency-US Dollar per Barrel. Price volatility of crude oil can impact economies of the world as it constitutes a major portion of the import bills of these countries. There are multiple factors which impact the prices of crude oil. Organization of Petroleum Exporting Countries (OPEC) controls approximately 61 percent of world’s supply. OPEC countries aim to maintain $100 per barrel and resort to production/supply cut in case of any change in demand across the world. Kingdom of Saudi Arabia along with other oil exporting nations formed OPEC in the year 1960. The top five countries Iran, Iraq, Saudi Arabia, Kuwait and Venezuela control the price movement and currently there are about 17 members countries in OPEC. Also, United States in last few  years has increasingly become a major producer of oil because of efficient production and use of advanced technology in oil extraction.

Crude oil prices just like any commodity is determined by demand and supply forces. China has become the largest importer of crude oil (20 percent of the total crude oil imports), followed by US (14 percent), India (9.7 percent) and Japan (6.8 percent). The recent spread of Covid-19 pandemic across more than 190 countries of the world resulted in massive lock-downs in different countries of the world. Also, restrictions and bans were imposed by countries on both domestic and international flights. The fall in consumer demand due to restricted mobility of people across the globe has decreased the demand for crude oil many folds.

Oil prices are also impacted by the Geo-political environment and political instability. Attacks on oil production facility, gulf war in the past spiraled the oil prices in the upward direction.

The novel corona virus spread from Wuhan which resulted in the complete lock-down of Chinese cities and resulted in fall in consumer demand of crude oil. The OPEC nations negotiated with Russia to reduce the supply of crude oil but the talks failed to take off. This has resulted in a price war between Saudi Arabia and Russia, bringing the crude oil price downwards. Saudi Arabia increased the production and reduced the price to $30 per barrel in order to destroy competition. The price crash may also impact the US economy which is the largest producer and second largest importer of oil after China. This price war can also be self destructive for OPEC nations specifically Saudi’s economy which is dependent on oil.  According to Fitch rating agency, the Kingdom needs to maintain oil price at $91 per barrel to sustain its economy. The analysts suggest that the crash in oil prices and looming uncertainty is also responsible for the fall of stock markets globally. The Dow Jones, S&P 500, BSE Sensex and Nifty witnessed a great fall as a result of Covid-19 and crash in oil prices post January.

The crude oil prices can only stabilize if the spread of virus is controlled and some of the lock down measures are relaxed by countries of the world.

Some of the questions to deliberate are:

-Will the price war of crude oil come at a logical conclusion?

-How the crude oil prices are related to stock market and gold prices?

-Do you think that renewable energy sources and Electric Vehicles will change the dependence of economies on crude oil and the status of Black Gold will change?


Corona and Its Impact on Global Stock Markets

Pandemic are diseases that manifest in the worst possible forms and spread across the world. Last time, when homo sapiens faced this challenge and mayhem was in the year 1918, when almost 1 percent (50 million) of the world’s population was wiped out due to Spanish flu caused by a similar strain of virus.

The origin of the Covid-19 is still not clear, while some blame it on the seafood market of China whereas others blame it to some other unknown reasons. Globalized World gives rise to diseases which are also global in nature and has currently impacted more than 190 countries of the world with China, Italy, Iran and Spain worst effected. Countries like US are also caught unaware and can become epicenter of epidemic. New York, the city which doesn’t sleep is facing  complete shut down.

Stock Markets are secondary markets for already existing securities. Stock prices are impacted by global factors, country specific factors and firm specific factor. Virus which by definition is a protein wall and some genetic material has created such a havoc and disruption in the Global Stock Market and also our Indian financial markets. Global stock markets around the world are coupled and hence witnessed contagion effect or spillover effect.  Pandemic has impacted businesses causing shutdowns of assembly lines and manufacturing units, airlines routes restricted, fleets grounded, electronics and mobile industries dependent on Chinese raw materials are impacted. Similarly, hotel industry, entertainment industry have slowed down and so is the mobility industry such as Ola and Uber. Consumers are ignoring those purchases which can be postponed from consumer durable to automobiles. The silver lining is some of the industries such a e-pharma, food and delivery portals are seeing improvement in sales. Dow Jones witnessed its greatest fall by 2000 points-with companies like Boeing, Apple, Goldman Sachs and Caterpillar falling by 100 points. Indian benchmark indices BSE Sensex and Nifty also lost nearly 37 percent which experts suggest is 40 percent of India’s GDP. Also, US businesses both manufacturing and services are adversely impacted. It has been predicted that world may witness a severe recession since 2008 financial crisis. In this globalized scenario the spillover effect is difficult to avoid, any development taking place at global and country level creates ripples which reverberates across the stock markets of the world. Also, the fear and uncertainty has resulted in Foreign Institutional Investors leaving the stock market which has caused the downfall of markets further.

Things may improve either through breaking the chain of virus spread through complete lock-down or huge number of testing done on suspected cases (as South Korea has done) or a vaccine which can be a preventive  can be developed on a fast track mode to further cease the spread at a bullet speed.

Some of the points to mull over-Will the world economy be able to recover and thrive again? Will the markets see corrections again after such a huge downfall and erosion of wealth?