Bassanese Bites: Oil Slick – April 27 2020

Global Markets

Not much has been able to roil the US stockmarket of late, but last week’s negative print on the front month WTI oil futures contract finally did the trick. The S&P 500 dropped almost 5% over two days but then staged a feisty comeback to end the week down only 1.3% – helped by an equally admirable fight back in oil prices. US bonds and gold benefited from the risk-off shift.

Why did oil prices go negative? Because the U.S., in particular, is awash in oil, and those left holding the nearest-term futures contract at expiration – and therefore required to take delivery of physical oil – would face very expensive US storage costs. Until the supply glut is removed, that means there’s a risk the current nearest-term June contract price could also go negative as it approaches expiry. [By the way, to reduce this risk, the BetaShares OOO ETF – which ordinarily would have exposure to the nearest-term WTI futures contract, has shifted its exposure to the longer-dated September contract for the time being.]

Funnily enough, one of the factors that eventually supported oil prices last week – and indirectly Wall Street – was talk that U.S. shale oil producers would likely need to slash production (due to their high cost base), which would clearly be disastrous for U.S. business investment and economic growth. But such is Wall Street’s bullishly blinkered view of late, such subtleties were lost on the market.

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