Oil prices tanked once again today, and West Texas Crude oil June contract has dropped more than 13%. Most of the sell-off is mainly because of the fear that the expiry date for this contract is approaching fast and there isn’t much space left for storage.
The anxiety amongst oil traders is that we are likely to see a repeat of what happened with the previous month’s contract. This is the reason that we are seeing many oil ETFs, such as USO, moving all of their positions out of the June contract to later months. If the price of the June contract falls below $10 then the next important area of support will be $5. A further drop from that will open the door for a panic sell-off and the possibility of negative oil price may become a reality once-again—meaning you will have to pay to sell oil.
Overall, I do contemplate that fundamentals are improving to a small extent because the US shale oil rig count has dropped vividly over the last week, and it is bound to have a positive influence on supply. As for the demand side, I reason we have hit the bottom. This is because, with the easing of the global lockdown measures, it is only a matter of time before we will start witnessing the demand equation showing more signs of life.
As for the equity markets, it is intriguing that we are not experiencing any momentous impact of weaker oil prices. The US and European equity markets closed strong yesterday, and today; the US futures aren’t trading significantly lower either. We are only seeing some minor losses for the US futures. Basically, investors are entirely ignorant of the fact that oil prices at the current levels mean a chief disaster for the US shale oil industry. It is not an event where one can afford to turn a blind eye.
A lot of focus is on the partial reopening of the economy and traders are hoping that consumers returning from quarantine will support the economy. The fact is that the consumers aren’t in their finest shape, and social distancing measures are going to keep the lid on the economic recovery for some period of time.
Some grave damage has been done to the global economy, and despite all the fiscal and monetary policy provisions, the structural damage is going to take some time to repair. In addition to this, Coronavirus has also altered many aspects of consumer behaviors.
I still hold the view that it is likely that the equity markets are going to revisit the COVID-19 low once the optimism of re-opening the economies starts to fade away.
On the economic docket front, consumer confidence data will be released later today, and the forecast is for 88. Any number that is below the 70-mark is likely to rattle the markets, but if we see a reading that matches the forecast or slightly better than the forecast, it could provide a further boost for the equity markets.
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