Oilpocalypse
/The markets are crashing: the S&P 500 is down more than 7% now, while the Vietnamese markets are down about 6%. The markets are down because people are worried that COVID-19 will have a bigger economic impact than they previously expected. And specifically in Vietnam, six new cases popped up over the weekend, which scared people anew.
Source: Investing.com
While I have been saying that markets have not been reacting enough, especially because of the impact on specific sectors like tourism, etc, I now think that maybe we are over-reacting. It’s hard to quantify this, but I have the sense that markets start picking up later this week. Just a gut feel.
However, one of the things that is compounding the virus fears and can have a very big impact on the world economy is the drastic fall in oil prices (down 23-25%). This is the lowest price since 2015 (it was just one month back then). Before that, it was 2004 when it was this low. That’s a long time ago!
Why is the oil price so low? Basically because Russia and Saudi Arabia are fighting over supply issues. Plus, both have gotten sick of US oil companies, mostly shale companies, producing so much oil. The goal from Russia’s perspective is two-fold: 1) to get Saudi Arabia to lower production, 2) to send the shale producers into bankruptcy, because at these oil price levels, their production is not profitable. Saudi has similar reasons: 1) to get Russia to limit production (at least this is what I suspect) and 2) to bankrupt shale companies.
Ultimately, this is not great news for parts of the US like Texas and North Dakota that are dependent on shale oil. There is a high likelihood that companies will go bankrupt.
Source: Vietnamese customs, Vietecon.com
What does this mean for Vietnam? Well, Vietnam is both an exporter and an importer of oil and petroleum products. Historically it has exported more than it imported (although it was never really a big player), but that has changed over the past few years.
The country imported 3.6m tons of crude oil (or almost 25m barrels) for a net cost of $1.6bn in 2019. That’s not that much, but it is up 3x from 2018. Adding in petroleum products and LPG, the country imported almost $10bn worth of oil or petroleum products, or $6.5bn on a net basis. These imports are about 4% of all of Vietnam’s imports.
But now this is all cheaper! The average price of brent crude was around $64 last year. If it miraculously stayed around $35 for the remainder of this year, the country would look for a 45% cut in costs, or $4.5bn. That would be cut the import bill by almost 2%. That would be great for consumers and would also mean a bigger trade surplus, all else being equal.
Of course, the positive effects of lower oil prices will mean nothing if demand generally contracts, and will depend on two things: 1) how bad is COVID-19 and 2) how bad are the measures to stop COVID-19?
My view is that it will be bad for another month or two, and then slowly things will pick up. But at this point, who really knows.