Margin calls triggered in crude oil led to across-the-board selling

The price of crude oil was frozen in consecutive lower circuits on Monday morning and the commodity eventually lost 30 per cent following a crash in the international markets. there was a slight recovery in MCX futures during the day, though, and the price ended the day down 23.8 per cent to Rs 2,406 a barrel. However brokers were seen selling everything they had to meet margin calls and cut losses, not just in crude but in practically every other commodity.

The margin on crude oil, which was set at 16.3 per cent on friday, kept on rising today with MCX imposing margins of up to 60 per cent.

The crude oil closing price of Rs 2,406 a barrel works out to just Rs 15 a litre of Brent, given that a barrel has 159 litres.

In Mumbai's spot bullion market, standard gold closed 0.9 per cent lower at Rs.43,838 per 10 grams while silver shed 2.4 per to end at Rs 46,005 a kg.

The fall was triggered by the crash in crude oil prices globally, following the price war between Russia and Saudi Arabia. Brent had fallen to $31 a barrel in the morning, down over 30 per cent from Friday’s close, after Russia not only backtracked on the Opec deal to cut output, but also stepped up production further in order to disrup the market for US shale. Russia's move triggered a similar response from Saudi Arabia, which also cut prices and apart from announcing a production increase.

These developments caused panic in markets across asset classes and had participants skeltering to meet losses in equity, debt, currency and commodity derivatives. The Indian derivatives market is price taker in major commodities such as precious metals, energy and base metals.

As a result many players who had gone long on crude oil had to pay additional margins beyond the 16 per cent they had paid on Friday.

Said Ajay Kedia, Kedia Advisory, Mumbai: “Today is a Black Day for the financial market as we have seen a ‘horrific fall’ in equities, commodities, and currencies after Crude oil plunged more than 25 per cent in one of the biggest one-day falls since the Gulf War of the early 1990s. Investors are literally bracing for a race to the bottom, as an all-out Opec ‘price war’ erupts between Saudi Arabia and Russia.”

With an extra oil output of up to 3.1 million barrel per day pouring into a slowing global economy that is now also having to deal with the coronavirus pandemic, Kedia said, “It will be rough sledding for the oil sector going forward. The price crash came at a difficult time for US shale, and has posed a conundrum for President Donald Trump. Lower oil prices are an important part of his pitch to voters, and he has frequently calling on Opec to bring them down. But a prolonged price fall could spell economic trouble for energy-producing states such as Texas and North Dakota. Falling Crude oil prices in Rising or expanding Economy is good but falling prices in falling economy is a sign of Ression.”

LME metals were also trading 2-3 per cent lower and on MCX all metals closed the day with a 1.5-3 per cent decline. Gold was stable but silver continued to fall with some improvement later.

All metals were down with aluminium losing 1.5 per cent,  Nickel, 3.3 per cent and copper and zinc 2.5 and 4 per cent respectively.

Anuj Gupta, Deputy Vice president-Research, Angel Broking said, “Today's fall in crude prices may impact metals and agro commodities. All commodity segments corrected drastically. In general, crude oil is the primary driver for global growth. A fall in its prices at a time when several countries are struggling with the increase in coronavirus cases has created an emergency situation and intense fear of a global economic growth slowdown.”