The collapse in WTI (West Texas International) crude oil futures to below zero early this week - down to negative $40 per barrel at the lowest point, a 300-plus percent drop in one day - doesn't exactly mean fuel will be available for free at the pump the next day, but it clearly indicates unprecedented trauma as the oil market drowns in oversupply. The benchmark had already been dropping because of epic demand destruction caused by the coronavirus pandemic. People are not driving cars, airlines have had to cut back operations to the point of bankruptcy, and most industries are still locked shut; standing the traditionally robust US summer demand curve on its head. Now there's just not enough storage capacity for all the excess supply. On tops of this, news of 'a wave of Saudi oil tankers' loaded with crude for delivery to the US sent the market through the floor. This is very bad news for the US shale oil and gas industry, which will now inevitably contract. That makes it very bad news for President Trump as well, since the shale patch employs more than six million people in the most blood red Republican states from Texas to Colorado that he simply must win for his reelection in November. It was only natural for the markets to take a tumble as well, with investors now questioning the strength of the recent minor recovery even more strongly. And quite predictably, risk appetite is wiped out of the market once again amid strong inflows into traditional safe havens in the currency and commodity markets, like the US dollar and gold. The oil collapse could not have come at a worse time for the US economy, which even the Federal Reserve Chairman Jerome Powell thinks has already entered recession. Now the country seems destined to once again experience the chain reaction of low oil, low inflation, growing defaults, low growth and political instability.

The global market must be relieved that WTI is not the most commonly used global benchmark. That honour goes to Brent, which covers a good two-thirds of global contracts, including Asian markets like Pakistan. However, while Brent has not suffered anything close to the type of collapse that WTI has, it's not exactly the picture of stability either. It stood at $74 just this January, when a US drone strike gutted Iran's General Qassem Suleimani's motorcade in Baghdad. Then it dropped to $20 per barrel because of a Saudi-Russian price war, but recovered to the 30s when President Trump intervened before declining steadily to around $22 per barrel when WTI collapsed on Monday. On Tuesday, though, it also fell 25 percent to hover around $19 per barrel. It is because of just these price shocks that the US and Canada have been thinking of slapping tariffs on inflow of Saudi and Russian oil to North America. According to some reports, President Trump even hinted at restricting arms sales to Saudi Arabia if Riyadh didn't quickly settle its dispute with Moscow a few weeks earlier.

Countries like Pakistan, which import most of their oil and are always vulnerable to sudden price movements, should not be too quick to celebrate. Some analysts are already predicting record fiscal space, etc., but these recent developments can have very serious ramifications for the local economy. Due to textbook contagion effect from WTI and Brent prices, the benchmarks on which oil prices of Gulf states are fixed will also decline. This means growth and job contraction, which will put downward pressure on remittances. There is already news of tens of thousands of Pakistanis losing their jobs in the Middle East because of the economic contraction caused by the coronavirus. The oil hit will make things even worse. The Gulf states are also the largest importers of our premium quality basmati rice, among other things, which leaves our exports open to downside risk in direct proportion to the shrinking of their economies. It will be a while before everybody really understands the true magnitude of these events. The biggest problem, by far, is that an 11-year bull run in the global economy was brought to an end not by any systemic failure within a system, but an exogenous factor like a virus. And, since Covid-19 is still without a cure, who knows how long the international financial system will remain gripped by uncertainty. In just under a quarter, the world has already changed enough for oil futures to drop below zero. If the pandemic cannot be controlled for a long time, or worsens, this could well be just the beginning of a secular bear market.