Oil prices are dropping as panic continues on the markets

The Coronavirus situation continues to create fear and tension this week around the world. However, that wasn't the main story yesterday. Oil prices dropped by over 20% yesterday, as markets learned the news that last week's OPEC meeting brought only more uncertainty to the energy markets.

OPEC tensions rising

The cartel, which includes the world's major oil producers, Saudi Arabia, Iran and Iraq, met last week in Vienna. The meeting included OPEC allies who are the major oil producers not members of the cartel, mainly Russia. The agenda of the discussions focused on the possibility of reducing oil production from April onwards, but the main friction was to reach agreement on the amount of cuts. Russia, which had been the antagonist in the talks, didn't accept the conditions, which led Saudi Arabia to take matters into its own hands.

The Saudis, who saw Aramco's share price fall below the IPO price for the first time, announced that they would not only reduce and offer lower prices, but also increase the offer. The move that took the markets by surprise saw Crude Oil drop to its lowest level in three years, with the price of a barrel reaching $27.23. A drop that made the price of a bucket of fried chicken at KFC more expensive than a barrel of oil. What will happen now?

Volatility in the markets

After the drop, which can be seen on the above illustration, markets seem to be finding a support price, which many hope will continue. The only question is whether a full price war will ensue, as the Russians seek to react in the same way, in order to encourage a possible price increase. Which it has clearly been able to do.

With the crisis in the oil markets, several indices that have exposure to oil through equities, such as BP, Shell and BHP Billiton, have all suffered huge losses as a result. UK's FTSE index fell by almost 9%, also reaching its lowest level in a few years.  The Australian AUS200 index saw all of its growth from last year swiftly wiped out.

As we have seen these markets decline, gold, the yen and the Swiss franc have all risen in value. As global safe-haven markets, investors relied on these markets in these times of crisis to ensure the safety of their portfolios. In particular, gold surpassed $1,700 an ounce at the end of this weekend. This is a level not seen in 8 years, when the markets found a way out of the mortgage crisis, which began in the U.S. housing sector.

That being said, and considering the employment figures that were just released in the United States when the non-farm payrolls were announced, the drop in interest rates was recorded. There still seems to be panic, and the question is what will it take to normalise the situation. Not only on the markets, but also in society in general. So far, the Corona virus seems to want to keep plowing ahead, but can it be stopped?!