Crude oil futures opened sharply lower on Monday, with WTI crude down more than 7% at one point and spot gold under pressure hovering around $1,720, while the dollar remained firm and markets focused on us first-quarter GDP this week. Meanwhile, the us stock market will usher in “super earnings week”, FAAMG, tesla collective debut. It is worth noting that the front-month contract for Brent crude expires on April 30, warning against sharp price swings.
Oil prices resumed their slide Monday, April 27, when Asian markets opened. The sharp contraction in demand caused by the new pandemic continues to weigh on the market.
U.S. WTI crude futures fell 0.6 percent at the open, then quickly extended losses to more than 7 percent. That erased Friday’s 2.7 percent raise.
Meanwhile, Brent crude futures also fell under pressure, then extended losses to more than 3 percent, ahead of the expiration of June brent futures on April 30, warning of a volatile oil market.
WTI crude futures have fallen more than 70 percent this year as a novel coronavirus pandemic has shut down major economies and an oil price war between Saudi Arabia and Russia has added to the market’s woes. Major oil producers agreed earlier this month to cut output by about 10 million barrels a day from may in an effort to stabilize the oil market. Saudi Arabia began cutting production earlier than expected last week, according to people familiar with the matter.
Oil traders around the world expect the oil market to oversupply in the coming months because of the economic shutdown caused by the outbreak. Producers may not cut output fast or far enough to support prices.
John Kilduff, a partner at hedge fund Again Capital LLC, said, “efforts to limit supply have not been able to match the magnitude of the drop in demand caused by the outbreak.”
Earlier this week, the may contract for WTI crude fell into negative territory for the first time in its history as the spread of a new pandemic hit demand and created a global oil glut.
Warren Patterson, head of the commodity strategy at ing, said: “the realization that negative oil prices are clearly spooking the market, there are fears that the same could happen to the WTI June contract and even to the Brent market.”
However, Patterson added that he believes brent is unlikely to follow WTI into negative pricing as the expiration of active futures contracts approaches.
Unlike WTI, which trades in real goods, brent trades in cash and does not take delivery at the end of the contract.
He said the latest sell-off in the oil market, following last week’s announcement of record production cuts, was likely to put more pressure on OPEC and other producers to cut output. “They are ready to implement record production cuts, and it will be difficult for them to accept further cuts,” Patterson said.
JBC Energy, a consultancy, also said in a report: “we do not expect brent to repeat the WTI tragedy and fall into negative territory because, unlike WTI, brent is settled in cash and has more locations for seaborne grades, but the possibility of closer proximity to spot prices is clear.”
Spot gold has come under pressure as oil prices have tumbled, trading around $1,725, buoyed by fears of a global economic slowdown and massive stimulus from major central banks.
Tai Wong, head of fundamental and precious metals derivatives trading at mandioc bank, said: “We are seeing short-term profit-taking in gold. However, with global balance sheets bulging and the outlook for the global economy still very uncertain, retail and institutional investors have been buying gold and the price is holding up well near its peak.”
America’s GDP hit in the first quarter
The impact of the outbreak will be first revealed on Wednesday when us GDP data for the first quarter are released. Eurozone’s first-quarter GDP will also test the markets on Thursday.
Business activity fell sharply at the end of the quarter as a novel coronavirus ravaged the world, forcing governments around the world to impose lockdown measures. Markets expect real GDP to fall at an annualised rate of 3.7% in the first quarter in America and 3.8% in the euro area.
If America’s GDP in the first quarter is worse than expected, its economic performance in the second quarter could be worse still. Markets will take their cue from expectations that GDP will contract by 12 percent in the second quarter.
Bob Schwartz, an economist at Oxford Economics, said in an interview that the GDP figures do not yet give a full picture of the virus’s virulence, but may provide a guide for the second quarter. In what should be an encouraging sign that the situation appears to be under control in the hardest-hit parts of the country, and that the stimulus package passed by congress conveys an intent to stabilize the economy, conditions are still tough for small businesses.
Wells Fargo expects the first estimate of first-quarter U.S. GDP, due on Wednesday, to be -1.2%. After a strong start to the year, economic activity in the United States came to a sudden halt in March with such negative effects that the bank thought it was enough to turn growth negative in the first quarter.
the bank notes that the public health crisis is having a full impact on the U.S. economy. Personal consumption spending is likely to turn negative in the first quarter as consumers begin to disengage from economic activity. Business investment spending is expected to be weak, while companies are more cautious, cutting spending even before the blockade is officially in place. Housing investment may have been the only driver of growth in the first quarter, but any positive factors could be exhausted by the end of the quarter. In many ways, market participants have begun to react to expectations that the COVID 19 outbreak will hit the U.S. economy hard in the second quarter.
“Super earnings week” is here
The U.S. earnings season is set to get busy this week, with nearly 150 s&p 500 companies reporting first-quarter results. So far in the first quarter, overall corporate earnings are down 14% from a year earlier, according to Refinitiv, a financial-market data provider, and the decline is expected to widen to 32% in the second quarter.
The five FAAMG companies (Facebook, Amazon, Apple, Microsoft, Alphabet, Google) that report from Tuesday to Thursday account for 20.1 percent of the s&p 500, 45.15 percent of the NASDAQ 100, and 13 percent of the dow.
In addition to the top tech stocks, earnings were released this week by long-watched industry leaders such as Boeing, tesla, Gilead Sciences, Pfizer, Qualcomm, ExxonMobil, McDonald’s and American airlines. With the exception of Monday, which was a bit tame, almost every trading day this week has been a big day.