In a truly bizarre turn of events, crude oil has dropped below $0 for the first time in history. Over the course of the day, traders watched as WTI crude oil crashed during its trading session, falling to $15 per barrel, and then $11, before finally giving out and turning negative. It is now so bad that traders are willing to pay for oil to be taken off their hands.
At its peak, oil futures contracts for May were trading at -$40.32 per barrel, before ending the trading day at -$37.63. This is a 306% drop in price.
The biggest factor affecting oil right now, as I stated before, is the lack of global demand. Oil consumption has fallen 30%, due to the fact that planes are stranded, and all forms of travel is restricted. And now, due to the lack of demand, traders are left with a large excess supply with nowhere to store it, and thus are trying to dump it as fast as possible. The main storage facilities for oil, which are in Cushing, Oklahoma, are fearful that they will run out of storage. The amount of oil stored there rose 9% in the past week, equalling to about 61 million barrels in total.
It is estimated that there are currently 160 million barrels of oil sitting in storage tankers around the world, due to the fact that refiners are not processing said oil.
Despite this drastic plunge, it is does not seem like traders think this will be an extended issue, as prices for the June delivery contract were more normal comparatively, with only a 14% drop, down to $21.32 per barrel.
Comparatively, prices for Brent crude also fell, but was nowhere near as bad as crude, because storage for it is more readily available.
When asked about the price drop in oil, US President Donald Trump said that it was a short term drop and that more production cuts were needed. He also said that the US government was looking into buying 75 million barrels of oil while the price was low, in order to place in strategic petroleum reserves.
Usually for consumers, a price drop in oil means lower prices for petrol. However, with this current price crash, it is unclear just how consumer prices will be affected.
We talked about the oil crash as it was happening, last night on our YouTube livestream. You can watch it below, or join us every day at 10.00am GMT and ask us questions.
On the 12th of April, the OPEC alliance, headed by Saudi Arabia, and Russia reached an agreement to cut the production of oil by 9.7 million barrels per day until June, effectively ending the ongoing price war between the two countries. As well as this they will continue to restrain output for at least the next two years. Following this news oil was able to climb back up to $24.50 per barrel, but since then has continued to steadily bleed out, now dropping below $20 in recent days. On the hourly timescale, crude oil will find support at the $19.53 mark if it continues to bleed out, and resistance at $20.32 if it can manage to make a recovery from these lows.
Not too long ago, after tensions between Saudi Arabia and Russia flared up once more, US President Donald Trump tweeted that he had spoken to both parties and expected a production drop of 10 to even 15 million barrels for WTI crude oil. Investors initially reacted to these tweets by surging the price of WTI crude all the way up to $28 per barrel, before doubts began to settle in over whether or not such a monumental deal was able to be struck between the two countries.
Now the agreement has been made, one that is even measuring up to Trump's claims, but oil's recovery is nowhere to be found. And part of this is that OPEC is now forecasting that the amount of oil consumption in the world will fall by 6.9 million barrels per day for the rest of the year, sharply revising its earlier predictions of merely 60,000 barrels. These figures are most likely the result of several more countries entering lockdown, such as Japan, and others such as France extending theirs. Of course, the restriction of travel means that oil consumption will fall sharply.
As well as this, the OPEC alliance is still on shaky grounds. After negotiations failed between the two countries, Saudi Arabia immediately engaged in a price war by increasing its oil production in an attempt to undermine Russia. And just last week the two countries were still on hostile terms, each blaming the other for causing the price war to begin with. It was only at the insistence of the US were the two countries able to come together to reach an agreement.
More news affecting WTI’s fall was the news that China had seen its first economic retraction since 1992. China, the first country to be hit by the full impact of the coronavirus, reported a 6.8% contraction in its gross domestic product for its first quarter, even lower than already pessimistic expectations of 6.5%. China is one of the biggest buyers of crude oil, and following this news oil dropped by 30 cents, from $20.10 down to $19.74 per barrel. And China's negative data is only the start. As the global economy grinds to a halt, so too does the need for oil. As long as demand is nowhere to be found, oil will continue to stay at its current lows.
Join our livestream on YouTube at 10.00am GMT every weekday, where we discuss key market moves, technical analysis, and answer any question you may have. Watch our last stream here, where we talked about the power of the US Dollar and the latest jobless claims data.
On Friday, the Non farm payroll data was finally released for the month of March. From the 8th-14th March, 701,000 jobs were lost in the United States, far exceeding predictions of 100,000. This is the highest figure of jobs lost in 11 years, and is only the start. The first state to come under lockdown, which was California, only started on the 20th. Therefore it is fully expected that the full consequences of the pandemic will only be truly reflected in subsequent months' data releases.
However despite this massive drop in jobs figures the markets reacted quite little to this news. The Dow Jones lost 3.6% on Friday, with the NASDAQ and S&P 500 both only dropping 1.5% as well. This can be explained in the fact that market sentiment is already extremely negative, and the published figures were more or less expected, as global markets prepare themselves for a recession. Dow futures are currently trading close to 22,000 points.
And in contrast, the US Dollar appreciated during all of this, rising to 100.703 points on the Dollar index, a fourth straight day of gains as investors continue to flock to its safety.
Prior to this there had been a record of 113 consecutive months of job gains, which has now been wiped out with the biggest loss in jobs since 2009. However, analysts are only anticipating these figures to become worse. Some are even predicting that April’s release could show a loss of 20 million jobs.
Released by the Department of Labor Statistics, the Non farm payrolls report is released on the first Friday of each month, and is a collection of various statistics, most importantly the number of people employed within the US, excluding agricultural and seasonal workers. As such it is a strong indication of the US economy, and as a result, the US dollar and stock indices as well. Therefore this release usually draws a lot of attention, with a lot of market movement preceding and immediately following the release as traders try to take advantage of the released data.
Just a mere month ago it seemed the US economy’s strength was unstoppable, with stock indices on record bull runs. Last month’s NFP release saw a gain in jobs of 225,000, which had far exceeded predictions of 160,000. And now after just a few weeks of being impacted by the coronavirus markets have become incredibly volatile, and futures look uncertain.
Crude Oil has also dipped for the day, following the news that Russia and the OPEC alliance had postponed their meeting to discuss the current ongoing price war between Russia and Saudi Arabia, the de facto leader of the alliance. Last week US President Donald Trump had announced on Twitter that he had talked to the Saudi Arabian Crown Prince Mohammad Bin Salman Al Saud, regarding the oil situation and that he expected the production of oil to drop between 10 to 15 million barrels between the two countries. That news caused WTI crude to spike up an astonishing 24%, and a further 11% the next day, where it peaked at $28/barrel. But now following this crude oil dropped back down to $26.58 per barrel. (Update: Russia has now reported that they are very close to a deal with Saudi Arabia to cut oil production, and that has caused optimism in oil prices once again, returning to a peak of $27.94.)
We are continuing to livestream on YouTube every day at 10.00am GMT. Our last stream last week on Friday talked about the market movements leading up to NFP, so take a look here:
This week’s jobless claims more than doubled last weeks’ record high, reaching 6.648 million. Last week’s figure of 3.28 million jobless claims was already 5 times larger than the previous record of 700,000. And now it has doubled this new figure again.
Economists have taken this as a sign that the government stimulus packages are already too late, with more than 10 million Americans having lost their jobs in this month already. Considering the US Labor Force is currently at 164 million, a 10 million combined figure of unemployment claims in the previous 2 weeks would put 6% of the American population without jobs. Added onto that the figure of 3.5% existing unemployment, and this could mean that close to 10% of the entire country is unemployed.
These figures are overwhelmingly in recession territory. Even during the global recession of 2008-2009, the number of jobless claims per week only reached 665,000 at its highest. Unfortunately even with the stimulus packages and rate cuts, businesses are laying off their employees en masse, especially in the hospitality and retail sectors, as those have been the hardest hit.
Conversely, oil posted its biggest one day gain yet, of 24.67%, after US President Donald Trump made a statement on Twitter that he had spoken to the Saudi Arabia Crown Prince Mohammed bin Salman, after previously promising to speak to Russian President Vladimir Putin, regarding the ongoing price war between the two countries. Trump stated that he expected the two countries to cut back on their oil production by 10, to possibly even 15 million barrels.
Immediately after the tweet was made, WTI crude jumped in price from $21.91 to $25.89, almost approaching $26 per barrel. However once the initial excitement faded, it once again fell back down, dropping below $24 at its low. This was most likely due to the fact that investors realised that even with a supply reduction, the demand isn’t high enough to drive prices back up. Of course, some were also doubting the validity of Trump’s tweets, questioning whether or not such a major agreement between the 3 largest oil producers in the world could even come to fruition.
The VIX volatility index has also decreased since the middle of the previous month, dropping from a record 82 points down to 50 now. Also known as the “Fear Index”, the VIX is a measurement of the level of expected volatility in the markets for the next 30 days, and is derived from the movement of the S&P 500. Initially moving below 20 points and holding steady, the VIX understandably surged following the global coronavirus pandemic, rising all the way to 82 points as the virus worsened across the world and economies ground to a halt. Despite unprecedented measures taken by Reserve Banks and governments around the world, such as the US Federal Reserve cutting the interest rate for the Dollar by 100 basis points, effectively dropping it 0%, as well as a $2 trillion economic stimulus package approved by the US Senate, volatility across all markets seemed to show no signs of wearing off. However, despite the drop in the VIX, a 50 point volatility forecast still represents a daily price change of around 3.4% for the S&P 500, which then translates to a +/-15% over the period of the month.
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WTI Crude Oil has experienced a tremendous sell-off as the price dropped 30%, falling below $30 a barrel. This is an unprecedented drop in the price of oil, with prices like this not having been seen since 1991 during the Gulf War. It comes off the back of the collapse of the OPEC+ alliance between Saudi Arabia and Russia, and Saudi Arabia deciding to slash oils prices as a result.
The OPEC, or Organisation of the Petroleum Exporting Countries, is an alliance between various oil producing countries, with Saudi Arabia its de facto leader as the country with the most oil production in the world. Saudi Arabia contains 18% of the world’s oil alone, and is the biggest exporter of oil, being comprised of 70% of its exports.
Originally a deal between the OPEC alliance and Russia to limit oil production, the collapse of the negotiations in Vienna led prices that were already declining to plunge even further. As Russia refused to agree to the terms, Saudi Arabia has now decided to engage in a price war instead, as it simultaneously promised to boost oil production to 10 million barrels a day in an attempt to gain more market share.
The market reaction to this move was immediate, as prices instantly dropped 30% as soon as the market opened. Trading at $45 per barrel when the market closed, prices dropped to $31, one of the biggest one day drops for oil in history.
As the biggest producer of oil in the world, Saudi Arabia is aiming to hit its competitors hard in order to win over new customers next month, which means that there is there is no floor for these prices to drop to. According to Goldman Sachs, Saudi Arabia could very well let oil drop down to $20 a barrel before they stop. Saudi Arabia could also be putting this enormous pressure on Russia in order to drive them back to the negotiating table.
This latest news throws an already skittish and volatile market into chaos once again. It comes just after what seemed to be the beginning of a market recovery, as US stocks seemed to finally be on the rebound after the crash experienced just a few weeks ago. The full effects of this price drop will only be made clear over the coming days and weeks, as we see just how long Saudi Arabia is willing to keep these prices going on for.