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Oil Crash Shakes Financial Markets

An international row between two of the world’s biggest oil producers – Saudi Arabia and Russia – has triggered a price war just at the time when the coronavirus crisis threatens the global economy.

Oil prices crashed by more than a fifth plunging and spurring a rush into government bonds as investors sought havens.

The FTSE 100 suffered its biggest intraday fall since 2008 this morning as the outbreak and plunging oil prices dragged the index below 6,000 points and sent stock global stock markets crashing.

London’s blue-chip index fell by as much as 8.7 per cent to just 5,899 points as it opened following a weekend of coronavirus turmoil.

It then rebounded slightly as traders scrambled to find their bearings, but stood 6.6 percent lower by 11.30am at 6,038 points.

The price of crude oil is about half the level it hit in early January.

The root cause of that is the coronavirus. It has hit demand for oil and some of the big exporters have been trying to stabilise its price. Last week a group of them discussed production cuts.

But the biggest producer among them, Russia refused and the oil price fell further.

Cheaper oil is obviously a benefit for users. Airlines have been hit by a decline in bookings, but cheaper fuel will offset that a little. And in time, there will be an impact on the price that motorists pay, although in many countries, including Britain, tax accounts for most of what they pay.

The Saudis are the biggest oil exporter in the world with the cheapest cost of production. The state-owned producer Aramco can get oil out of the group for less than $3 a barrel, which puts them in a stronger position to survive a price war.

But a prolonged battle would put pressure on even the Saudis’ finances, which is why they are keen to diversify their economy under ruler Mohammed Bin Salman’s Vision 2030 programme. Ratings agency Fitch estimates the Saudis need a price of $82 a barrel to balance the books.

What does it mean for the UK?

The UK is a net oil importer, so firms across the country will have cheaper production costs. Motorists should also feel the benefit at the forecourt, although the majority of a litre of petrol is made up of fuel duties and VAT.

A low oil price should provide a modest tailwind for an economy likely to be ravaged by coronavirus in the next few months. The Bank of England could soon be writing a letter to the Chancellor explaining why inflation is more than 1 percentage point below its official 2pc target.

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