Negative oil prices put the oil market in the spotlight this week, with brent crude, which has always been strong, falling more than 20 per cent on Tuesday and the us crude contract for June selling down to single digits at one point, underlining that short-term market overhang remains severe and the near end contract still facing a big test. The collapse in oil prices has revived a familiar scene in global markets: everything seems to be selling off except the dollar. This session, the market continues to focus on the evolution of the global outbreak and the direction of the oil market.
The oil market is crazy again! The oil producers are not sitting still…
Tuesday’s frenzy continued as the oil market became the focus of global attention after an unprecedented slide in oil prices into negative territory.
With no end in sight to the global oil glut caused by the collapse in demand for fuel oil caused by the coronavirus outbreak, brent crude plunged more than 25 percent to close at $19.50 a barrel on Tuesday and dipped as low as 30 percent to around $17.51.
Meanwhile, the us crude futures contract for June WTI, which triggered three circuit breakers on Tuesday, plunged 43 per cent to close below $12 a barrel after falling nearly 70 per cent to a record intraday low of below $6.6.
U.S. crude futures rebounded from negative territory in May to settle at $10.01 a barrel as most of the open positions entered this week were liquidated on Monday.
Konstantinos Venetis, senior economist at TS Lombard, an independent investment research house, said in a report: “nobody wants to hold contracts that are coming due because of the shortage of available inventory. Us shale producers are fast approaching the point where they will be forced to shut down their operations.”
The ICE exchange, meanwhile, is preparing for the brent contract to trade negative. CME will allow negative oil options to list from April 22.
Separately, the us crude fund, the largest oil ETF, was down 20 per cent in pre-market trading on Tuesday. Trading in the USO was suspended again after the administrator announced a change in the fund’s structure and a switch to a closed-end fund.
USCF, which manages the USO ETF, said before the close of trading on Tuesday that the fund had applied to change its position structure, clearing the front-month contract and shifting its 5 per cent WTI crude to the August WTI crude contract. The fund currently has about 40 per cent of the WTI crude contract in June and about 55 per cent in July. After the announcement, the USO suspended trading again, down 35 percent. On Tuesday, the USO ETF closed down 25.07% at $2.81, down nearly 80% since the start of the year.
Eric Balchunas, senior ETF analyst at bloomberg, said the fund’s further repositioning of the position could help prevent its net asset value from falling below zero. However, on Tuesday, WTI June futures prices were not optimistic. If June futures prices also turn negative, the net asset value held by USO etfs could fall below zero, bloomberg said, citing Wall Street strategists.
The world’s big oil traders expect WTI futures to also fall into negative territory in June as a result of a massive supply glut caused by the new cap’s control measures and a collapse in oil prices caused by a lack of global storage space.
Pierre Andurand, a commodities hedge fund manager, said trading in the oil market was “dangerous” and could see a deep negative oil price in the short term. ‘it will take a lot of capacity shutdowns for the market to rebalance,’ he added.
State street global said on Tuesday that only a major deal between Saudi Arabia, Russia and the us state of Texas could ease the inventory crisis and change the current situation, or oil prices would remain volatile and low, but such a deal seemed highly unlikely.
As oil tumbled, calls to calm markets had little effect.
Russian energy minister novak said OPEC + was fully capable of responding if necessary. ‘the price collapse will be temporary,’ said national economic adviser frank kudlow. Mr Trump tweeted on Tuesday that he had directed the energy and Treasury departments to come up with a financial rescue plan for the us oil and gas industry. He says reopening America is the biggest tool to support oil markets, and 20 states will reopen soon.
OPEC + held an emergency conference call with energy ministers on Tuesday to discuss the collapse in crude prices, but the statement after the meeting showed it had not agreed on any new policy measures. Oil producers reiterated previous pledges to cut output and agreed to hold regular meetings to assess market conditions.
Texas oil regulators were unable to reach an agreement on Tuesday, postponing a vote to cut production again until May 5.
The collapse of the global oil market has affected tens of thousands of jobs and frozen billions of dollars in capital spending. Unprecedented falls in global demand for fuel and massive oversupply have overwhelmed storage Spaces such as tanks, pipelines and tankers.
A new liquidity crisis?
As oil prices collapse, global markets are once again selling indiscriminately: everything except the dollar is falling…
As the collapse in oil prices spread to the June contract, equity investors were wary of the damage done to the economy by the sweeping measures that have shut down business and led to millions of job losses.
Stocks on Wall Street ended the day with losses across the board: the dow Jones industrial average lost 2.67 percent as plunging U.S. crude oil prices and bleak corporate outlook heightened fears of a deep recession. The s&p 500 fell 3.07 per cent; The nasdaq fell 3.48 percent.
Asian markets also opened lower on Wednesday, with Asian shares trading lower and the mood in the markets notably cautious.
“What you’re seeing is a correction in previously well-performing areas and people looking to take profits,” said Quincy Krosby, market strategist at prudential financial. “the question is going to be, is this a consolidation after a rapid rally or the start of a more important correction in the broader market?”
The sell-off came amid panic selling of gold, which briefly dipped below $1,660 as investors rushed to cash in to cover losses in other asset classes, which were hit by declines in prices caused by a novel coronavirus that ravaged the economy.
In Asian session on Wednesday, gold continued to hover around $1,685, with a focus on oil for further performance.
“The oil price really dragged the whole commodity market down with it. A lot of people are selling lucrative positions and staying on the sidelines to see if the energy market’s weakness spreads further into precious metals, “said Bob Haberkorn, senior market strategist at RJO Futures.
The dollar has done particularly well amid a global sell-off. The dollar index rose above the 100 mark and tried to climb higher, hovering around 100.30 for the day.
“Yesterday’s sharp drop in oil prices spooked investors and although some economies are starting to lift the blockade, it is clear that the road back to normal will be long,” Jonathan Coughtrey, managing director at Action Economics, said in a report.
“Oil is off the lows, but a lot of companies are going to be hit and companies may start to go under,” said Shane Oliver, head of investment strategy and chief economist at amp capital investments in Sydney. If stocks fall, the safe-haven dollar could rise. The only thing constraining the dollar is that the fed has done more quantitative easing than any other central bank.”