Liam Dann: Oil price crash could be coronavirus GFC moment

Asian stock markets, including Japan's Nikkei 225 index, plunged on Monday after global oil prices fell. Photo / AP

Today's oil price crash may well prove to be the moment that the economic shock of coronavirus spilled over into territory financial markets haven't seen since 2008.

If it does, let's first take a step back and remember that the New Zealand economy got through that. And we'll get through this.

But wow.

As if the enormity of the economic disruption wasn't enough, the world now has to deal with its major oil producers facing off in a high stakes game of chicken - showing no regard for the damage they are doing to already battered market confidence.

Oil prices plunged as much as 30 per cent as markets opened this morning - the biggest one-day fall since the start of the first Iraq war in 1991.

That followed falls of 10 per cent at the weekend on fears that Russia and Saudi Arabia are heading into launching a full-scale price war.

It can be hard sometimes to explain why lower oil prices - which should flow through to petrol pumps - are bad news.

But the speed with which the oil crash flowed through to other markets left no doubt as to the precarious nature of things.

Sharemarkets, bond markets and other commodity prices all plunged.

The rapid deflationary shock of oil prices falling so far, so fast, will leave few parts of the financial world untouched.

Indeed, fears are growing that it will spread to credit markets, threatening the kind of freeze that stopped the world in its tracks in 2008.

It is hugely frustrating, yet somehow predictable, that a short-term political power play should add a new and unwelcome layer to the current crisis.

The industry had hoped that major players would agree on production cuts to mitigate the coronavirus impact on global demand.

But talks in Vienna failed late on Saturday (NZT).

Saudi Arabia slashed its prices and upped production.

Bloomberg reports it has plans to boost oil output next month to well above 10 million barrels a day. A highly aggressive response to the collapse of the talks.

A guard stands in front of Aramco's oil processing facility, September 2019, AP File Photo.

Off the record sources said it could be prepared to go as high as 12 million barrels in an effort to stare down the Russians.

This comes as US shale oil production hit a fresh peak in February.

Prices for benchmark Brent crude and West Texas crude are now down close to 50 per cent since the most recent pre-virus peak.

Unless there is some political resolution analysts believe the price could now fall below US$30 for the first time since 2016.

"Saudi Arabia is now really going into a full price war," said Iman Nasseri, managing director for the Middle East at oil consultant FGE, told Bloomberg.

"This is going to get nasty," said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund.

The failure to come to an agreement represented "the worst-case scenario that could have happened", Manish Raj, chief financial officer at Velandera Energy, told the MarketWatch news site.

"The breakdown was a classic game theory outcome — each side stands to gain if the other side backs down. However, if neither side backs down, then they both lose," he said.

In New Zealand petrol pump prices have fallen marginally since January, but falls have been offset by the lower kiwi dollar - which boosts the cost of imports in local currency terms.

The kiwi has fallen from US66c when the virus emerged as an economic threat in mid-January to US63.5c - a fall of 4 per cent.

It has rebounded from a low of US62c last week as expectations for local interest rate cuts grow.

That suggests motorists are due to see further significant falls at the pump in the next few days.

That could at least offer some relief for businesses struggling with falling demand and cashflow issues due to the virus.

But longer term, the prospect of a price war, with the damage it can do to already battered market confidence, does not look like good news at all.