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Oil and the Euro are Bureaucracy Victims

The hopes of the markets are not yet fulfilled: the peak of the spreading of the disease in the United States has not yet passed in peak.
Alexander Kuptsikevich
WTI Crude Oil

However, amid the stabilization of these numbers, the stock indices showed growth, reckoning on the governments and central banks’ stimulus.

Yesterday Japan joined the US, Germany, and Italy in announced the funding of almost $1 trillion (20% of GDP) to support small and medium businesses. The US said that the unemployed would start receiving additional payments next week.

The fast and well-coordinated work of politicians promises to be a vital skill for the economy in the coming months. Fast approval of support for financial markets, small and medium companies, as well as assistance to people who have lost their income, would radically accelerate economic recovery.

This is a case where multilateral negotiations are evil. Comprehensive and coordinated steps turn into an endless chain of talks. This applies to both the oil market and the pan-European support package.

Europe’s bureaucratic machine showed itself in a negative light this morning when the EU could not agree on a €500 billion stimulus package, postponing negotiations to Thursday. These reports turned the euro down, taking about 0.5% in half an hour.

This situation brings us back to the era of Greek and Spanish debt problems, which almost cost the region the unity and took from the euro about 30% of its value against the dollar. Investors are afraid that the countries did not draw the main conclusion from the situation at that time. In essence, a quick decision decreases the final price.

The same can be said about approaching Mega-Opec negotiations. The inability of the officials of Russia and S. Arabia to reach an agreement and the subsequent show of muscle caused a significant drop in oil prices, i.e. to deeper economic pain for these countries. Now, a month later, they are already discussing almost ten times larger cuts.

The chances that the US, Canada and, say, Norway will join the agreement are decreasing. The US said it would not participate in the voluntary reduction, because now there is a decline in production due to the collapse of prices.

In the long term, this is the right market approach, giving an advantage to those who have a lower price. However, now, when the energy market is in a shock, it does not need to float freely, but rather to support itself by regulating production or consumption at the government level.

Without that, oil prices may face another decline in search of a bottom, a path that promises to be difficult for both oil producers and financial markets that are nervously responding to oil price volatility.

by Alex Kuptsikevich, the FxPro senior market analyst. 

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