OIL-Sinking to levels not seen in this millennium

The price of crude oil has plunged, sinking to levels not seen in this millennium. For the first time ever, we have seen the price of WTI (expiry of May) fall into negative territory.

The mix of two black swans, namely the tragic spread of coronavirus and the missed agreement between OPEC+ has been the trigger for this dramatic collapse. Even though the producers’ alliance did finally reach an agreement earlier this month for a cut of 9.7 million of barrels a day of production, the oil price has crashed further still. The deal was simply not enough with analysts estimating a fall on the demand side of close to 30 million barrels per day, three times the cut reached by OPEC+.

Although Brent has fallen noticeably, the collapse has been even more dramatic for WTI, the benchmark for US oil, with the May contract dropping below $0 a barrel, plummeting to an incredible -$40.32 at its most extreme. Oil has become so unwanted that traders were simply paying to not receive physical delivery of crude.

However, with the May contract having now expired, the sharp contango in the market has seen the price to increase again. On CME, the June WTI contract is already trading at $21.22, while July it is just below $27. If we look further out to September, the price is even higher and is above the psychological threshold of $30. 

This huge contango is driven by the enormous oversupply that is drowning prices in the short term. Some of this surplus should start receding in the medium to long term once the global lockdown, which has effectively turned the tap off on demand, eases. Another factor to add into the mix are storage costs, which are particularly high in this scenario with the majority of tanks already full.

Therefore, any investor seeking to take a position on oil, be that on futures, CFDs or EFTs, must factor in all these considerations and fully understand the implications of contango on prices before taking the plunge in these dramatic times.

FOREX-The plight of crude oil yesterday painted the most vivid illustration

The plight of crude oil yesterday painted the most vivid illustration so far of the havoc being reeked in financial markets by the economic fallout from the coronavirus. The US dollar emerged as one of the ‘winners’ in this unprecedented situation, becoming the clear choice for investors when turbulence and uncertainty take over. The Dollar Index climbed more than 0.3% during the early part of Tuesday’s session, gaining ground against other currencies in a clear safe-haven trade by concerned investors, as market sentiment turned bearish following the plunge of the May contract of WTI crude oil to negative prices. In the current environment more greenback gains are likely.

EUROPEAN SHARES-Trading stance remains uncertain

Stocks opened mixed in Europe on Monday with most benchmarks little changed as the trading stance remains uncertain for the beginning of the week. There were no important announcements or developments to disturb market sentiment this weekend and with no significant economic data release today, there is a high chance investors will keep their focus on both corporate results as well as on any sign of improvement in the struggle against the pandemic. Market participants were happy to notice fewer daily deaths in New York, Italy, Spain and the UK even though we aren’t out of the woods yet. Despite those reassuring numbers coming from the most impacted areas, there is still a lingering fear that economies may reopen too hastily. Investors will then pay close attention to how the situation is going to evolve in the next few days in Germany after the country reopens stores today, a first step to the end of the virus crisis and a real experiment for other nations, especially in Europe. On the corporate side, most investors will be waiting for quarterly results from companies like IBM, Vivendi and Virbac in order to have a clearer idea on how business has been impacted so far. 

The Euro Stoxx-50 Index is trading sideways while the German DAX-30 is the eurozone’s best performer. The market is still trading above 10,650pts, its first available support before 10,620pts, but has slowed down since testing the 10,775pts level. A break-out of its first support could quickly lead prices lower, towards 10,620pts and 10,545pts by extension, where a wide gap of more than 200pts remains open.

OIL-The oil war combined with the devastating effect of the coronavirus

The oil war combined with the devastating effect of the coronavirus-induced lockdown on economies has triggered a dramatic fall in the price of oil with WTI plunging to its lowest level in more than 20 years with the May contract sinking below $15. On top of that, there is a wide contango across contracts, demonstrating both the huge oversupply currently as well expectations that some of this surplus will reduce in coming months as the producers’ cuts start to take effect and the peak of the global lockdown passes. 

This huge contango and wide difference between the prices of various futures contracts are making it very complicated to put long-term trading strategies together as it remains expensive to keep positions open for any length of time, due to the enormous contango effect.

BOND-Crucial week for European bond markets

This is a crucial week for European bond markets, with the EU called upon to find a solution for a recovery fund as well as other solutions to help countries endure this acute economic crisis caused by the coronavirus. Overall there is uncertainty about bonds markets with the potential for the number of companies struggling to repay their debts to grow sharply over the next few months.

A cash crisis in some sectors, such as airlines and restaurants, is almost inevitable due to the lack of income in March and April and it will be crucial to see if there are any effects on bond markets as a result. Investors will be more cautious before lending money to the companies in the worst affected sectors. 

These extreme times present a scenario in which on the one hand central banks are injecting liquidity to markets, while on the other hand, the increased risk to lending would normally see interest rates rise. So far investors have kept their faith in central banks, both in the EU and in the US, but it will be crucial that markets retain their confidence in the next few weeks.

FOREX-Failing to prepare an adequate response to the coronavirus crisis

The pound is down versus other major currencies at the start of the European session on Monday. Sterling’s losses to the euro and the dollar, of 0.35% and 0.25% respectively, come at a time of heightened political tension in the UK as the government is accused of failing to prepare an adequate response to the coronavirus crisis, with the spotlight pointing at Boris Johnson. Michael Gove, one of the highest profile cabinet members, confirmed the Prime Minister failed to attend five emergency meetings in the run-up to the acute phase of the pandemic. Also worrying investors is the fact that, unlike several other countries, the UK authorities haven’t given any indication of having a lockdown exit strategy at a time when the burden of the country’s economic paralysis starts to weigh heavily on market sentiment.