Markets crash as oil price war adds to virus worries

Singapore stocks have worst showing since 2008 as fears of global recession grow

Traders work the floor of the New York Stock Exchange (NYSE) on March 5, 2020, in New York City. PHOTO: AFP

Stock markets across the globe tripped and crashed over the worst oil price collapse since the Gulf War in 1991 in yet another sign that the global economy, already weakened by the coronavirus outbreak, is headed for a recession.

In what is the sharpest sell-off for the Straits Times Index since the global financial crisis, Singapore stocks plunged 6.03 per cent - their worst one-day showing since Oct 8, 2008, when they dived 6.6 per cent.

The trigger was a stand-off between the world's two oil superpowers, Saudi Arabia and Russia. When Russia refused to slash production - and hold up prices - Saudi Arabia called its bluff by offering discounts, promising to raise its own production and pushing Brent crude prices from around US$50 a barrel to around US$32 - a slump of more than 30 per cent.

The markets panicked. Thailand led the sell-off in Asia, losing 7.96 per cent, followed by Australia, which plunged 7.33 per cent, while Indonesia shed 6.58 per cent. Taiwan, Shanghai, Malaysia and Taiwan each lost more than 3 per cent. Hong Kong slid 4.23 per cent.

Within minutes into the United States markets opening yesterday, the plunge in the S&P 500 hit 7 per cent, triggering an automatic trading halt.

After trading resumed, the Dow Jones Industrial Average was down 1,384 points, or 5.35 per cent, just past midnight, Singapore time.

With Covid-19 cases in Europe and the US accelerating, investors snapped up safe-haven assets, sending gold to seven-year highs at the US$1,700 per ounce level.

But it was the oil price war that tipped virus-weakened markets over the edge. When Russia refused to support oil prices, Saudi Arabia decided to test its holding power by sending them crashing.

"It is much harder to enforce oil supply controls when countries are in desperate need of revenue," said Maybank Kim Eng senior economist Chua Hak Bin, referring to Russia's refusal of additional output cuts.

While the fall in prices should, on the face of it, help Singapore's transport, logistics and air travel sectors, the possibility of a global recession may hurt the economy as a whole.

Also, refinancing could become an issue because some banks may be reluctant to increase their credit exposure to companies hard hit by the virus, Dr Chua said.

While Singapore's top lenders - DBS, OCBC and UOB - have extensively provisioned their oil and gas exposures, a protracted oil price slump could hurt them.

"The banks will post higher non-performing loans because of a further economic slowdown in Singapore and lower corporate earnings, on top of disruptions already caused by the coronavirus," Mr Eugene Tarzimanov, a Moody's vice-president and senior credit officer, said.

OCBC Investment Research head Carmen Lee noted that the last time oil prices hit the US$30 level was in 2016. Singapore's gross domestic product fell from 3.1 per cent in the first quarter of 2016 to 2.4 per cent in the third quarter, she said.

"With the Covid-19 outbreak, the collapse in oil prices has added further pressure to the growth outlook. Most sectors are projected to see slower to negative growth this year," she added.

Said OCBC economist Selina Ling: "We are going to see inflation dropping, which is not a bad thing. That will give central banks room to ease monetary policy. And if Russia comes back to the negotiating table, there may be some stabilisation in oil prices."

Dr Chua said: "Unlike the 2008 crisis, this crisis is caused by a virus that's hitting demand and disrupting supply chains. If you can contain the virus, demand will come back."

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A version of this article appeared in the print edition of The Straits Times on March 10, 2020, with the headline Markets crash as oil price war adds to virus worries. Subscribe