There is an adage: Buy the rumour sell the fact. Some articles seem to imply that today’s drop in oil price is also related to corona and part of the global retrenchment in the market. Nothing could be further from the truth. Oil price was definitely muted due to slack demand from oil consumers like airlines, but the 30% price decline is due to an oil-specific event. Russia and Saudi Arabia, the world’s largest and second-largest producers of oil, dissolved their fragile agreement from 2016 to coordinate on oil production. That agreement was controlling the amount of oil being produced in the only 2 oil-producing countries that have spare production of any significance. Saudi Arabia and Russia have both instructed their state-controlled organisations to produce as much oil as possible and flood the market. Saudi Arabia has drastically cut its official price benchmarks. For oil-consuming countries, this is a boost – if they take benefit from it in this window of opportunity. Corona fears would have meant that the trader community would already have been bearish on oil. With this move, all those bearish positions will yield massive profits and price will bounce slightly to reflect the profit-taking.
I look at market situations like these to spot buying opportunities. Now could be a good time to put on some call options on equity index futures. Some long positions could be taken on companies that buy commodities especially oil. Their input costs are going down faster than corona is impacting the demand side.
The world is in search of yield and treasury bonds and gold does not provide that. While in terms of crisis they rally, they do not provide long term steady healthy yield. Investors will return to markets if they have not already done so. Now is the time to pick some great bargains.
