COVID-19 and the Historical Oil Price Collapse

Let’s start with what is on everyone’s minds and tongues. On Monday, US Crude Oil prices reached a negative 40 USD mark. This is an unprecedented event. We are truly in a never ever before experienced fundamental environment.

In the meantime, stock indices appear to have continued to recover. Shouldn’t have the oil crash caused a drop in stock prices.

The oil price slide was unprecedented as May futures fell by as much as 390% into negative territory.

That decline continued on Tuesday. Futures found support, with WTI up by around 10% on Wednesday morning.

We did see the equity markets catch up to a certain extent on Tuesday, with the Asian equity market seeing red on Wednesday.

There has been a crude oil – equity market dis-connect, however. Looking at oil prices, the general outlook is particularly negative, contributing to the downside based on demand.

Looking at the equity markets and even ZEW Economic Sentiment numbers out of Germany and the Eurozone, which were positive, markets appear to be expecting a V-shaped rebound. This is in contrast to what crude oil prices are suggesting. The fall in equity markets was not a correction, however, and there could be more downside ahead for the equity markets.

I’ve been an advocate of a more material correction before we can expect an upward trend to begin.

Current levels appear far too high when considering the economic climate and outlook for corporate earnings.

We are also still in the pandemic. While we are seeing an easing in lockdown measures it’s certainly not the start of an economic rebound.

So, all-in-all, crude oil prices seem to be a good indicator at the moment.

So the stock markets are holding firm. There are opinions floating around that it is the retail sector keeping stocks up, as the capital that in a normal environment would have been used for consumption is being invested in stocks.

Well, when you have initial jobless claims at 6m plus, you might see high net worth individuals day trading.

There would have been some opportunistic buying that would have contributed to the S&P500’s best week since the 1970s, however.

Day to day, are retailers really piling into equities and riskier assets? There remains plenty of uncertainty and so cash is always king and so is the Dollar.

While there is some support its unlikely to last once you see fund managers moving into cash. A herd mentality would result, which would sink the markets.

So support for now, but you don’t want to bank on that support really…

Interestingly commodities appear to have remained steady. Gold remains near the 1.700,00 mark. In theory, it should give in to the pressure from the oil drop?

Traditionally we do expect some correlation between crude oil prices and gold. Looking at the market dynamics, however, we have the pandemic that persists.

That’s driving demand for safe havens including gold and the Greenback. It’s a hedge against inflation, however. So, while we expect support for gold, once the pace of the spread of the virus slows, gold should see some pullback.

There’s also the current interest rate environment to consider through, which has provided stability for gold…

Markets are also looking at supply and demand for crude oil. That has put pressure on OPEC, Russia, the U.S, and the likes of Canada to rein in output.

We’ve talked about this before. We spoke of the Saudis being able to stomach oil prices at sub-$20. Well, they’ve got it. Shale producers along with Russian and Canadian oil producers will be hurting.

So, a pullback in production is needed and that should also contribute to aligning gold and crude more closely.

As long as the pandemic continues and the lockdowns remain, we’re not likely to see much of a sell-off in gold, however…

There should be an end to the job losses, as at one point the firing and temporary layoffs should reach their maximum.

If you keep laying off at 6m plus a week then the number is bound to begin falling back. A lockdown for 6-8 months, however, could deliver another round of sizeable layoffs.

You would expect the number of layoffs to now ease back. That does depend, however, on states, less affected by COVID-19, taking the necessary preventative measures.

Any new hotspots in less affected member states would spell trouble.

Such an outcome would deliver another jump in layoffs…The worst should be over but if we see the spread of the virus accelerate then it’s a different story.

Since we mentioned the fundamentals. How is the fight against COVID-19 going on?

In terms of the fight against the virus. You would have to say that it’s been relatively successful. The West was slow in understanding what measures were needed to contain the virus early on.

Over the last few days, we are seeing the number of new coronavirus cases drop and that’s positive. Particularly when we compare it to the levels we were seeing in the week prior and in March.

There is another issue, however, and that is whether there is the same amount of testing.

Some countries are talking about ramping up testing to get a better picture. We are also talking about antivirus and immune system protection but we are not there yet.

When you start hearing of certain governments easing lockdown measures it’s a little alarming. There is the possibility of reinfection and there are areas of the EU and U.S that have yet to be materially impacted.

So borders are going to need to remain shut… The containment measures are working, however, the numbers are proving that, so at least that is step 1.

The news has been mixed on our end throughout the week. We have simultaneously seen reports of a vaccine coming up in fall and different speculation about a year and a half. In general, it can be observed that this is far from over.

What future developments could we expect in regard to the pandemic?

The markets are now looking at step 2. We’ve got containment measures and the lockdown in place. Next is a cure and also an effective treatment. The vaccine is the top priority but that is going to take some time.

There’s been a lot of talk about having a vaccine in place by the summer. It’s going to take longer, however, for the testing process and for mass production of a vaccine.

That doesn’t bring an end to the pandemic near-term so that needs containment measures, etc. to remain in place.

The governments, therefore, need to prevent an escalation and acceleration of new cases near-term.

IF TIME IS:  Despite all attention being paid to fundamental virus news, we know that in March the Purchasing Manager’s Indices caused notable currency value adjustments. This week, the April PMIs are scheduled to be published.

PMI numbers are going to be interesting. March numbers were pretty dire for the Eurozone. The U.S saw continued expansion when looking at the ISM survey numbers.

We’re expecting more deterioration for France, Germany, and the Eurozone.

For the U.S, anything under 30 and we would expect some reaction. While we expect doom and gloom, there is a reality that sets in once you see the figures…

Outro – We conclude that whatever happens in the future, it is bound to be challenging for the whole global economy and the people that keep it working.