Saudi Arabia’s shock decision to increase crude production from next month, after falling out with Russia over how to deal with the impact of coronavirus on the demand for oil, prompted the price of oil to crash on world markets on Monday.
That plunge, together with the lockdown in Italy and what stock market professionals believe is an inadequate response to the coronavirus threat from the US, prompted a worldwide stock market rout on a scale unseen since the global financial crisis of 2008.
Oil companies were among the worst affected as investors digested the prospect of severely curtailed profits, while airlines, which have already been hit hard, suffered further falls.
The biggest losers on a day of turmoil in the markets included:
Oil
The prospect of an oil glut triggered the biggest single-day oil price crash in 30 years. The price of crude oil nosedived by as much as 30%, to $33 a barrel, the worst one-day fall in crude since the start of the first Gulf war in 1991. It later recovered slightly.
Oil companies make up about 10% of the UK stock market, while US energy stocks also slumped on the S&P 500. The biggest fallers on the FTSE-100 were BP (down 19.5%) and Shell (down 18%). Seven of the top 10 losers on the FTSE 250 were companies in the oil business, led by Premier Oil (down 57%) and Tullow Oil (down 31%).
One analyst said oil businesses, whose investors are already under pressure to sell their fossil fuel stocks because of the climate crisis, would struggle for profits. “Listed oil companies operating in this environment are more fragile than at any time in the past 20 years,” said Mark Lacey, head of commodities at investment manager Schroders. “The current oil price isn’t profitable even for Saudi Arabia.”
The International Energy Agency (IEA), the agency established to monitor the security of global oil supplies, said it believed demand for oil would shrink for the first time in a decade owing to impact of the coronavirus. The Paris-based body added that demand could fall even further if countries fail to contain the virus.
Airlines
Airline stocks were hit again on Monday, continuing a trend that has wiped 25% – or $40bn (£30bn) – off the value of global airlines in the last month.
Shares in carriers including budget carrier easyJet, British Airways owner IAG, Air France-KLM and Lufthansa all fell, in a range of 2%-9%, despite the fact that a lower oil price at least offered the prospect of lower costs.
Investors remain focused on the impact of slumping demand and grounded aircraft. On Monday BA, easyJet and Ryanair cancelled dozens more flights to the coronavirus hotspot of northern Italy.
Junk bonds
An index that measures the risk associated with corporate debt posted its biggest increase since the collapse of Lehman Brothers. The Markit CDX North American Investment Grade Index reached its highest level since 2016 in the process, according to Bloomberg.
Junk bonds, a form of high-risk corporate debt, will be closely watched, particularly because they are so important to the US fracking companies that were hit by Monday’s oil price slump. Shale and fracking businesses are among the biggest issuers of junk debt and concerns are mounting about the impact of defaults if companies are unable to refinance or repay their debts.
The International Monetary Fund has been warning for some months that low interest rates have encouraged companies to take on high levels of debt, and could be a potential time bomb in the event of another global recession.
Deutsche Bank warned that defaults among US oil and gas companies are inevitable, with around $13bn (£9.9bn) of debts due to be repaid by the end of 2021 from the most heavily indebted fossil fuel firms.
Ratings agency Standard & Poor’s has warned that around 33% of oil and gas firms have negative outlooks on their credit ratings (a measure of their financial strength, which is vital for borrowing money on reasonable terms), which is far higher than the long-term average of 19%.
Distressed companies
Struggling businesses seeking money to shore up their finances were also hit hard. British carmaker Aston Martin Lagonda, whose rescue fundraising is under way, fell a further 20% to a fresh low of 211p. China is a key market for Aston Martin’s vehicles.
Debt-laden shopping centre owner Intu Properties, which owns the Trafford Centre in Manchester and Lakeside in Essex, saw its shares slide a further 2%, closing below 5p. The firm has a valuation of just £67m, while it has debts of £4.7bn. The company had to postpone its emergency refinancing earlier in the month, blaming extreme market conditions. It needs to raise at least £1.3bn from investors in order to secure a recently arranged overdraft facility from its lenders.
