Rupture between OPEC and Russia produces extreme volatility in the market
Oil has plummeted almost 30% in the first hours of trading this Monday after the break on Friday between the Organization of Petroleum Exporting Countries (OPEC) and Russia, in its negotiations to try to cut demand and thus contain the price collapse due to the coronavirus. The collapse, which with the passage of the first hours has been reduced to around 20%, is the largest since 1991, in the final stretch of the Gulf War.
The blow leaves the level of 40 dollars per barrel far (unprecedented levels in four years), puts the oil producing countries on the ropes, and above all, those that have to incur higher extraction costs or that pump a crude of lower quality and is a serious blow to a handful of Latin American nations: Venezuela, Ecuador, Mexico, Colombia, Brazil or Argentina, among others.
On Friday, the barrel of Brent already fell 9% but the price cuts applied by Saudi Arabia over the weekend, which have been considered a declaration of war in the market, have exacerbated nervousness and volatility in the markets.
Now Saudi Arabia also wants to increase its production to 10 million barrels per day. It could even increase it to 12 million if it deems it necessary, which is the limit of its production capacity.
The opening of Monday in the European Stock Markets is being equally moved: after two weeks of trouble in the financial markets, the curves seem far, far from dissipating. After the crashes registered in Asia during the early morning, which predicted a new black day in the global markets, the main European markets have opened with falls of between 4% (Italy) and 8% (United Kingdom), with the futures of USA pointing in the same direction. In the midst of a storm, investors have chosen to take refuge in historically much safer assets such as gold, German and US debt (the latter at historical lows), the dollar or the Japanese yen.
Extreme volatility in currencies due to the collapse of oil
The Saudi decision has caused an earthquake in the international markets, which goes far beyond the punctual fall in the price. The future price of Brent oil in May is at $14.25 per barrel. Stock markets are in a slump, with US and European futures down 5%. Currencies such as the Norwegian krone or the Mexican peso have collapsed, while the Japanese yen has shot up more than 2.5% in its status as a refuge value. The debt plummets, with declines of 25 basis points in the US bond yield. In addition, oil companies have shown historical collapses: the Chinese CNOOC or the Australian Santos have dropped 20%.
The collapse of Oil has especially affected two currency pairs included among the Majors, such as USD/JPY and USD/CAD.
The massive flight to safe havens has caused USD/JPY to drop over 3% at the opening of this Monday session, falling below 102 for the first time since November 2016. This week the USD/JPY price will continue to dominated by the demand for investor protection, but it would not be surprising if the Bank of Japan intervenes to stop the rapid rise in the value of the yen. Since the country’s economy relies heavily on exports, it cannot afford to have a very strong yen.
The daily MACD shows that the bearish pressure is at its highest level since February 2022 indicating that the selling pressure will continue in the short term. This would be exasperated if the Federal Reserve decides to apply another emergency interest rate cut before its March 18 meeting.
The fall in the price of oil has caused a generalized depreciation in the currencies linked to its price, among them the Canadian dollar. USD/CAD jumped 0.95% at the open, accumulating a gain of more than 1.5% at the European open, bordering on its ML since May 2022.
The trend in the pair remains strongly bullish with the possibility of hitting 2016 highs at 1.4689 in the coming days.