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“ ‘Crude has become a bigger problem for markets than the coronavirus. It will be virtually impossible for the S&P 500 index to sustainably bounce if Brent continues to crater.’ ”
That’s Vital Knowledge founder Adam Crisafulli, formerly the author of Market Intelligence at JPMorgan Chase JPM, -5.16%, commenting Sunday on the recent plunge in oil prices.
Oil logged its biggest daily decline since 2014 in Friday’s session, dropping 10% as a deal between OPEC and its allies, led by Russia, collapsed in Vienna. Crude oil CLJ20, -21.07% BRNK20, -21.00% fell sharply late Sunday, as did futures on the stock market.
The failure to come to an agreement “represents the worst-case scenario that could have happened,” Velandera Energy CFO Manish Raj said. “The breakdown was a classic game theory outcome — each side stands to gain if the other side backs down. However, if neither side backs down, then they both lose.”
Crisafulli explained in a note just how critical oil is to the U.S. economy, considering the number of people who work in the industry and how important oil and gas companies are to the bond market.
“The sector is like the ‘FANG’ of credit, esp. high yield, given the enormous amount of debt it has outstanding,” he said. “As a result, the implosion of crude prices delivered a major blow to fixed income over the last 72 trading hours, exacerbating overall market panic.”
He also predicted Saudi Arabia can’t tolerate a depression and won’t be so “cavalier” this time because “the country’s fiscal break-even oil prices remains very high, Saudi Aramco is now a public company, and MBS’s grip on power isn’t yet absolute.”
Meanwhile the stock market continues to get beat up as the coronavirus spreads. The Dow Jones Industrial Average DJIA, -0.98% closed Friday down another 257 points while the S&P 500 SPX, -1.70% and Nasdaq COMP, -1.86% also ended firmly in the red.
As “bleak as the backdrop is,” Crisafulli said there are reasons for bullishness, including the notion that the OPEC deal may not be dead yet, the potential for the expansion in the pool of assets eligible for purchase under future QE programs and positive developments on the coronavirus front.
