Expect some rebound in oil prices after the exceptional fall, says Port Shelter Investment Management

The big talking point this morning is the sharp fall in crude prices as well as US stock futures. Both plunged as fears of a global oil-price war combined with coronavirus fears rattled traders worldwide.

Oil prices plunged after Saudi Arabia announced massive discounts on Saturday to its official selling prices for April. The move came after the recommended additional production cuts was rejected by Russia.

Richard Harris, the chief executive of Port Shelter Investment Management said, “The coronavirus was the thing that kicked everything off in terms of trying to spook the markets but now we are in a situation of falling asset prices and falling asset prices are going to lead on to concerns about the liquidity. So, what we are now going to see is the talk from the authorities about liquidity support for small companies. They need to protect the banks as they did the last time."

According to him, we will now probably see more spending budgets, which is rather ironic as one of the key things is the fact that there is so much debt out there. Somehow some of that debt has to be destroyed.

He is of the view that we probably may see some sort of a rebound in crude prices because this has been an exceptional fall and Saudi Arabia and Russia will come to the table and discuss.

"Whether oil prices are at USD 35-45-50 per barrel, it doesn’t matter in terms of the fact that these the prices need to be higher to support the economies of many of those countries. In addition to that, low oil prices themselves are not going to act as a catalyst for growth,” he added.

“At the moment we have a real demand shock. We would have seen in China how road transport, air transport have declined enormously during this virus outbreak. We have got the same in Italy, we have got slowdowns in Europe, because people are not travelling. There isn’t demand there for oil that we had before. So, oil price may well recover but don’t think that is going to be beneficial to what we are seeing elsewhere in the markets,” said Harris in an interview with CNBC-TV18.

When asked in such a situation where should one put their money, he said, “We are in a risk-off situation. Whatever the excuse is– coronavirus, oil, Fed rate cutting when they shouldn’t cut quite so much, the markets are now looking at a possible liquidity crunch and that is the thing the authorities need to avoid."

“Globally, we have to assume that recession is here. We are not going to get positive growth by losing a quarter of growth in China, in the US, in Europe. We are going to see negative numbers this year. The big question the investors will have to look on from now is what the recovery looks like and what are they going to do in the meantime. We are not going to get necessarily a sharp recovery,” he stated.

"The problem with markets like India – emerging markets (EMs) – is they follow very much what the global markets are doing. If the global markets are falling hard then obviously most markets will fall hard even though India might benefit from USD 34 per barrel oil. So I think once again markets are very correlated now," he said, adding that market are going to move in different ways, whether it is short sharp shocks or long sharp shocks, they are all going to move together and only after that the recovery will see some sort of differentiation start to come in.