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Can oil’s crash cause a second all-market panic?

Updated: Aug 31, 2024
Published: Apr 21, 2020
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Oil’s Black Monday

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The drop from $35+ started because of the global pandemic and the severe drop in demand on oil. It was then aggravated by a price war between Russia and Saudi Arabia which overflowed the supply in the market.

Yesterday the front month for WTI (Western Texas Intermediate) crude dropped to never seen before levels; sub-zero. The negative price occurring only on the May delivery took place as investors were willing to sell at any price or even pay to get their positions off their hands to avoid taking physical delivery of the barrels at contract expiration as storage is running tight in North America.

Pandemic Crash

The pandemic caused all markets to crash due to a liquidity crunch. Since then, the Federal Reserve stepped in with trillions of dollars in stimulus which pushed the markets higher by 30% (S&P500). It seems that the markets have yet to catch up with the reality that unemployment claims are at all-time highs, small business stimulus package has been depleted and the death toll remains on the rise in many countries. The question becomes after this bloody Monday: will this trigger another all-market selloff?

S&P500 and BTC

The event dragged down the S&P500 by over 4% since yesterday and Bitcoin has been following suit with the index’s moves for the past few weeks which pushed BTC’s price to under $7,000.

This correlation while not typical, and certainly goes against the "Safe-Haven" argument, is what occurs during liquidity crunches. During a crash there are two safe havens at different times. First cash as every market participants battles to lay their hands on it and second comes scarce resources/commodities such as Gold and potentially Bitcoin.

The latter only comes as an economy is exiting a recession and not in the midst of a crash. Hence, if the oil crash expands to the S&P500 and triggers another selling round, crypto will likely not be immune to it.

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