Oil price collapse results in fourth biggest one-day decline in the FTSE on record

“Many investors have been waiting for capitulation in the markets before thinking about buying on the dips. History suggests capitulation is quickly followed by despair and that is potentially the best time to buy ahead of a market recovery. Monday’s market destruction might suggest we are moving from the panic to the capitulation stage of the investing-linked emotions cycle,” says Russ Mould, Investment Director at AJ Bell.

“Thinking about buying in today’s market is only for the brave and there remains considerable uncertainty about the spread of coronavirus and its effect on economies and society.

“By 9am the FTSE was trading 7.1% lower at 6,004 which put the index back to the levels seen before the EU referendum vote in early 2016.

“The index initially fell to 5,899 on Monday, representing an 8.7% decline which is the fourth biggest one-day fall on record. The worst falls were recorded on 19 October 1987 (-10.8%) and 20 October 1987 (-12.2%) during the Black Monday crash, and then on 10 October 2008 (-8.8%) as the global financial crisis unfolded.

“Very few stocks escaped the misery. In early trading on Monday funeral services group Dignity was among the stocks in positive territory, perhaps as investors predicted it would see an increase in demand. However, this rally was short lived and its shares quickly started to fall.

“Among the biggest risers was Lidco, up 9.5% after it reported increased demand for its blood flow monitors from China in response to the coronavirus.

“The biggest fallers were oil stocks after shock waves were felt in the commodities market.

“The 30% collapse in the oil price is historic even by the standards of this volatile commodity and is the largest single day decline since the 1991 Gulf War.

“Saudi Arabia’s decision to enter a price war has seen traders take flight. It is increasing output at a point when oil is already facing a big hit to demand from the coronavirus.

“A previous attempt between 2014 and 2016 to grab market share by pushing US shale oil producers out of business was ultimately a failure. The weakest operators in North America were wheedled out and the rest improved the efficiency of their operations and refined their technology.

“Time will tell if it plays out differently in 2020 but, unless there is a rapid recovery, the collapse in crude is likely to put significant strain on state finances in both Saudi Arabia and Russia, as well as other countries which are major producers of oil.

“Conversely a falling oil price may provide some respite to consumers of oil amid the coronavirus disruption as it feeds through into lower costs for transport and energy.

“The accompanying slump in share prices of oil and gas firms is unsurprising and a big contributing factor to the scale of the FTSE 100’s collapse as index heavyweights BP and Royal Dutch Shell drop 20%.

“Logically the most pronounced falls are seen at heavily-indebted sector constituents where there will be increasing speculation about their ability to service their borrowings and over potential breaches of debt covenants.

“This explains the 50% to 75% falls for Tullow Oil and Premier Oil at the market open.”

These articles are for information purposes only and are not a personal recommendation or advice.