Early in March news of oil price war between Russia and Saudi Arabia came out sending shock waves to several markets amidst the uncertainty already brought by fears of the corona virus pandemic. Dow Jones Industrial Average (DJIA) dropped more than 2000 points while S&P500 plunged to more than 200 points at the start of the trading last March 9. Major Asian markets such as Hang Seng and Nikkei also felt the ripples. The Philippine Stocks Exchange Index, for its part, lost 6.76% bringing it to its 4-year lows at 6300 level.

A Brief Background

In late 2016, OPEC members comprising of 14 countries have agreed to cut oil production in an effort to prop up oil prices due to increasing oversupply and booming U.S shale oil, a major substitute for the conventional crude oil. The cut in production lasted until first half of 2017. By the end of the same year, another agreement was made between OPEC countries and Russia (OPEC+) to continue the production cut until the end of 2018. In late 2019, OPEC and Russia once again convened and agreed on output cuts that was projected to last until end of the first quarter of 2020.

However, due to the unforeseen spread of new corona virus in Hubei province and other parts of China in late 2019, Beijing has resolved to locking down million of its residents in quarantine in an aim to contain the virus resulting to decline in oil consumption. Being the world’s largest importer of oil since 2016, China’s reduction in oil utilization has sent direct impact on the global oil market; and with the continued progression and spread of COVID-19 to areas outside China, oil prices plummeted further bring the price in its new lows.

On early March, Russia has finally disagreed with OPEC member to further cut production on coming months. Russia is not a member of OPEC but was regarded as a key ally of the group [thus the term OPEC+]. This decision of Russia came as a surprise to OPEC countries and the entire oil market plunging oil prices by nearly 10%. From Russia’s position, the strategy of cutting down production only props up US oil at the expense of other oil producing countries. While several output cuts executed since 2016 helped support oil prices, US shale production also continued to expand. On the other hand, as a response to Russia’s pronouncement, Saudi Arabai announced cutting prices from its official selling price. Russia, meanwhile, further expressed to increase production once the existing OPEC+ agreement expires at the end of March.

What Does this Mean for the Philippines and Companies in PH Stock Market?

Like China, the Philippines is also a net importer of oil. Being a net consumer than producer, the Philippines is expected to benefit from the oil price war waged by both Russia and Saudi Arabia. Oil is a major inflationary contributor in major commodities and a decrease in price may help ease up inflation rate if prices continue to slide. However, with the current condition of the country, these benefit may not be felt quickly given the limitation to travel, move products, and boost operation.

While low oil prices can be beneficial for households and businesses who consumes oil as part of its operations, it cannot be said the same for oil companies whose business rely directly on oil distribution and refineries such as Phoenix Petroleum ($PNX), Petron Corporation ($PCOR) and Pilipinas Shell ($SHLPH).

Revenues of oil companies will likewise decrease if oil prices continue to plunge and over supply persists to balloon. Investments taken by these companies may even have to be reduced and cut costs if situation continues. An early negative sentiment was already felt by investors when price cut was announced: Petron stock price declined by more than 7% and Pilipinas shell stock price dived by more than 8%at the onset of the price war.

Another looming threat in the global oil industry would be the gaining traction of electric vehicles. Although e-vehicles have not gained significant market share in the Philippines, market for this vehicle were seen rising in other western countries. With existing scenarios of excess supply, cheaper prices and threat of alternative source of energy, it is expected that recovery will not be a walk in the park for the oil industry.

Happy Investing!