Markets Halt After Huge Oil Sector Disruption
The stock market was halted this morning after overnight futures trading pushed stocks lower on Monday. A 7% decline in the S&P 500 from the prior day’s close automatically triggers a “level one breach”. This is where trading is halted for 15 minutes. From there, a Level 2 halt would trigger at a decline of 13% with a level 3 halt coming in when the market is down 20% and trading would be suspended for the remainder of the day.
This time, it wasn’t just about concerns over the coronavirus. Oil and gas markets saw major disruptions over the weekend. Saudi Arabia and Russia are two of the world’s oil superpowers. They had worked together since 2016 to control oil output, which would further support prices. But with oil demand dropping because of the spread of COVID-19, the partnership became an even more vital part of oil’s economics.
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Members of the Organisation of the Petroleum Exporting Countries (OPEC) were ready to make a deal with the world’s oil producers, led by Russia. However, on March 6th the meeting broke up without agreement. This, in turn, sparked controversy among analysts and spooked investors.
A Slippery Situation
Oil prices dropped as Saudi Arabia took aim at Russian Production. Russia on Friday rejected an agreement with OPEC on cuts in oil supplies to bolster prices. That stemmed a massive drop in oil prices over the weekend, which in turn, pushed equities even lower on Monday morning. But many had been preparing for this since Russia made its stance known on oil production. The popular Reddit board, /r/WallStreetBets summed it up perfectly heading into the Monday morning session:
Political and economic damage from the coronavirus is mounting. Thanks to the virus disrupting commerce, oil supply needed to be tweaked. But obviously, this wasn’t something that all major producing countries agreed on. The Dow plummeted more than 1,800 points as the sell-off from Asian and Australian markets rippled across North American markets on Monday.
On top of this, the yield on the 10-year Treasury note dropped below 0.50%. These are record lows and the entire situation is one that many new and younger investors haven’t been exposed to yet. The coronavirus panic pared with the dire situation in oil made for the perfect storm for a sell-off at the start of the week. As far as the last time the S&P was at this level, it was back in the summer of 2019. The drop essentially erased gains from the last 9 months.
This is a developing story and we will update as new information comes about.