On March 8, Saudi Arabia announced it would ramp up production and cut oil prices as OPEC+ price setting talks broke down. The Saudis' move to regain market share sent global markets into a tailspin. On March 9—the 11-year anniversary of the beginning of the current bull market—US stocks, as measured by the S&P 500, had their worst day since 2008 (until Thursday when coronavirus fears caused stocks to lose 9%, the largest daily decline since 1987). Bond prices jumped as rates plunged—the 30-year US Treasury broke below 1% and the 10-year US Treasury dropped as low as 0.318%.
In the wake of the announcement, oil prices plummeted towards $30, which is less than half the near-term peak set in early January (see Oil plunges on Saudi price cut chart). While all 11 S&P 500 sectors lost more than 4% on Monday, energy stocks were hit hardest, dropping 20%. The S&P 500 halved those losses on Tuesday, but stocks were deeply in the red again on Wednesday and Thursday. It's possible investors could remain in chaotic price discovery mode over the short term.
On Wednesday, Saudi Arabia once again affirmed its intent to increase production by about 2.5 million barrels per day beginning on April 1, and would up its production capacity to 13 million per day. Oil prices declined on the news.
The price of oil—as well as other commodities like metals and agriculture—has a significant impact on the entire market (as the recent oil shock and subsequent stock/bond market reaction displayed). In addition to energy companies, changes in oil prices greatly affect industries like airlines, delivery services, and manufacturers.
If you are actively monitoring the market, you may want to include oil prices, as well as other commodities, among the factors you are analyzing.
Will oil prices stay low?
Several factors have helped push oil to multiyear lows. Coronavirus has reduced global demand for energy, leading the International Energy Agency to cut their 2020 global demand forecast by 365,000 barrels per day to 825,000, which would be the first year-over-year decline since 2009. The Saudis' move to cut prices this past week put a big exclamation mark on the decline.
The recently announced travel bans implemented by the Italian government and US government, as well as restrictions on public gatherings worldwide, may also continue to worsen the demand picture for energy prices.
While Russia and Saudi Arabia have said they are open to OPEC+ cooperation, Russia announced they may increase their crude output by 500,000 barrels per day over the next few weeks. Moreover, according to recent research from The Hightower Report that can be found on Fidelity.com, "US production is likely to remain close to record highs for quite some time."
A recent Reuters survey of production last week forecasted US crude oil stocks to have a weekly increase of 1.8 million barrels, which would be a 12-week high (the US is the world's largest energy producer). This combination of weak demand and high production levels could translate to oil prices remaining low. "The market probably needs to see several events occur before there is upside momentum," Hightower notes.
Of course, if coronavirus fears subside, and global oil producers come to terms on production cuts, that would likely lead to higher prices. Also, stimulus from governments around the world could help stabilize oil prices. Tuesday saw oil prices rebound a bit on news of "US fiscal stimulus measures, one of which was (proposed) government aid to US shale producers," according to Hightower.
You can access these reports, and other energy market commentary, on Fidelity.com via the Markets & Sectors research page.
While oil prices have been on the slide, gold has glittered. In fact, gold is now trading at its highest level since December 2012, helped by coronavirus fears impacting economic activity and risk assets like stocks (see Gold accelerates gains in 2020 chart). The safe haven bid for gold has helped push prices up near $1,650 per ounce.
A recent report from Hightower notes that, despite the momentum behind gold, there are reasons to be cautious. "One complicating factor could be if traders need to liquidate gold positions to cover margin calls from a selloff in equities."
Hightower also highlights the most recent Commitment of Traders (COT) report showing managed money traders were net sellers of 16,296 contracts of gold for the week ending March 3, reducing their net long positions to 268,676. "This could be a problem for the bulls. But the virus problem may not have peaked, and this may keep safe haven interest simmering," according to Hightower. The COT report can be a helpful look into the trading activity of metal buyers and sellers to help you monitor the metals market.
Fellow precious metal silver has not fared as well as gold in recent months, but there may be reason to be bullish. "With the gold/silver ratio approaching its peak from 1990, we might expect silver to be in a better position to rally off of ideas that it is a cheaper safe haven option," Hightower notes. "However, it may take an improvement in the economic outlook for this to happen, as the fundamental demand for silver is tied to the economy."
Agriculture fades into the background, but still important
Oil (and precious metals to a lesser extent) have dominated the headlines recently. Before the coronavirus outbreak infected market sentiment, trade wars dominated headlines, and agriculture commodities such as soybeans, corn, and wheat were in focus.
In particular, as US and China sparred over tariffs, soybeans were among the goods caught in the crosshairs. Since soybean prices peaked in August 2016 and then plunged to a multiyear low in September 2018, they have gradually firmed. According to Hightower, there are reasons to be cautious now. "Meal and soybean oil export sales have been very impressive recently, but soybean sales, especially to China, have been very slow from the US. Sellers are motivated in South America and supplies are at a record high so it is difficult to see reasons for speculative buyers to get active short term."