Oil prices recovered some lost territory on Tuesday after crashing nearly 31 per cent yesterday following the failure of Saudi Arabia and Russia to reach an agreement on further production cuts.
Brent, the most widely traded crude benchmark, was up 10.33 per cent at $37.91 per barrel, while West Texas Intermediate was up 10.18 per cent at $34.30 per barrel at 3.56pm UAE time. Oil's rebound came as the US suggested tax cuts as a possible relief to the markets roiled by the twin impact of the coronavirus on supply chains and trade as well as an oil price war between Saudi Arabia and Russia. The tax cuts could help prop up financial markets, which tumbled as oil sank. The MSCI global index fell more than 7 per cent on Monday, the Dow Jones Industrial Average index dropped more than 2,000 points, its biggest one-day loss ever, to close down 7.79 percent, while the S&P500 index plunged 7.6 per cent. The ten-year US benchmark government bond yield, which serves as a barometer for borrowing and saving rates, fell to 0.54 per cent.
The benchmarks recovered after suffering their steepest decline in single day trading in 29 years, as the Opec+ alliance failed to agree on deeper production cuts on Friday and producers are expected to ramp up output significantly.
Brent lost $15.65 from its weekly close to settle at $34.36 per barrel on Monday, while WTI lost $14.6 of its value to close at $31.13.
Meanwhile, Saudi Arabia said it would boost production to 12.3 million barrels per day in April after it slashed prices to its Asian buyers by as much as $6 as it looks to clawback market share from rivals.
The Saudi move follows Russia's reticence to agree to further supply cuts of 1.5 million bpd to counter a slowdown in demand from the coronavirus outbreak. The dispute later led to the breakup of the alliance, which had been going strong since late 2016. The Kremlin also wanted to target the threat of the decentralised US shale industry, which has propelled the country to be the world's top oil producer.
Opec+ had been drawing back 1.7 million bpd from the markets since the beginning of January, with additional voluntary commitments from Saudi Arabia. Riyadh had shouldered much of the burden of the cuts and wanted non-member allies to do their part to help balance the market and prop up prices, which declined nearly $10 by the first week of February from above $65 as the coronavirus epidemic gained ground.
The latest price crash has echoes of the 2016 price collapse when oil fell below $30 prompting the Saudi-Russian alliance to counter US shale, which flooded the market with cheap crude.
"While lower oil prices are typically, over a long-term horizon, seen to be positive for the economic outlook, the lesson drawn from the 2015/16 episode is that a very sharp correction in crude prices can do significant short-term harm through," said Eli Lee, head of investment strategy, Bank of Singapore.
Other consequences of the bearish market could be the lowering of capital expenditure, as well as layoffs across the energy industry, which happened during the 2014-16 price slump.
Oil exporters would also be facing weaker fiscal and trade balances, requiring fiscal measures to counter the economic impact of the epidemic, Mr Lee said.
Meanwhile, the IMF's chief economist Gita Gopinath noted that the reverberations were felt on the supply and demand for dry bulk shipping stocks such as building materials and commodities, similar to the impact felt during the global financial activity.
"[This reflects] curtailed economic activity associated with the unprecedented containment effort. This drop was not seen in recent epidemics or after the 9/11 attacks," she said in a blog on the IMF's website.