Oil prices tumbled on Wednesday (March 11) after Saudi Arabia dialled up its price war by hiking production by one million barrels a day, while a rally in equities went into reverse as investors nervously await a US coronavirus relief plan.
Markets had been showing signs of much-needed stability in early trade following two days of wild gyrations, thanks to a pledge by US President Donald Trump to unveil measures to counter the effects of the disease on the worlds biggest economy.
Crude had provided support, rising for a second day after Monday’s meltdown that marked the commodity’s worst selloff since the 1991 Gulf War.
But jittery investors slowly sold out of the oil market as Wednesday wore on and then slumped deep into the red after energy titan Saudi Aramco said it plans to raise its output capacity to 13 million barrels a day.
“Saudi Aramco announces that it received a directive from the ministry of energy to increase its maximum sustainable capacity from 12 million bpd to 13 bpd,” the company said in a statement to the Saudi Stock Exchange.
The hike marks the next volley in a production standoff with Russia sparked by Riyadh at the weekend, when it cut prices, sparking fears of a war for market share.
Both main crude contracts fell more than one percent, having been up as much as five per cent earlier in the day.
The move also came after Russian Energy Minister Alexander Novak told state-run TV channel Rossiya 24 that Moscow was open to cooperation with the Saudis and OPEC to address the price crisis, saying: “I want to say the doors arent closed.”
The U-turn on oil markets reflected a similar move in Asian equities, which had been well in positive territory in early exchanges.
Tokyo and Seoul ended more than two per cent down, while Shanghai finished 0.9 per cent lower and Hong Kong shed 0.6 per cent.
Sydney sank 3.6 per cent, putting it into a bear market — a drop of at least 20 per cent from a recent high — just two weeks after hitting a record. The index has several firms that rely on trade with China, while energy stocks have also been hammered by the oil rout.
Singapore and Taipei each lost at least one percent. Bangkok, Wellington and Jakarta were also lower, though Manila and Mumbai eked out small gains.
In early trade, London rallied two per cent, Paris jumped 1.7 per cent and Frankfurt gained 1.8 per cent.
Trump on Tuesday promised “major” economic measures to combat the impact on the US economy and held talks with Republican lawmakers, with an eye on a cut in payroll taxes as well as help for airlines, the cruise industry and small businesses.
The announcement from the president came as other governments pledge to act against the outbreak.
Italy’s leadership, which has put the entire country in quarantine, is eyeing a USD 16 billion package, while Japan has unveiled a multi-billion-dollar emergency package.
The Bank of England (BoE) slashed interest rates by 50 basis points, hours before Chancellor of the Exchequer Rishi Sunak was due to deliver a much-anticipated budget that is expected to outline a huge support plan.
Australia and Canada are expected to unveil measures in the coming days.
“Expectations for a major fiscal stimulus package by the US government have underpinned sentiment – even if the volatility suggests the market still needs a bit of coaxing,” said AxiCorps Stephen Innes.
“Indeed, investors were in desperate need of leadership from policymakers. Central banks can do their bit, but in times of viral cataclysm, its governments that must be seen as in charge of the proceedings… Trumps actions evidenced how little it takes for markets to respond favourably.”
But the White House has yet to produce any concrete plans and observers warned about a possible sell-off should investors be left feeling short-changed.
“Having decided President Trump will save the world… financial markets could be setting themselves up for a severe disappointment should the promised fiscal goodies get bogged down on Capitol Hill,” said OANDA’s Jeffrey Halley in a note.
While leaders gear up to fight COVID-19, the disease continues to wreak havoc across the planet, killing more than 4,000 people and leaving close to 120,000 infected.
On currency markets the safe-haven yen edged back up against the dollar, having gone into retreat Tuesday, while the pound lost one US cent after the BoE rate cut, though it soon clawed back about half of those losses.