As we mentioned yesterday, April started in a similar way to those horrible March days, as the Dow Jones had another near 1,000 point down day, falling 4.44%, after officials said the US could see as many as 240,000 coronavirus deaths.
Unfortunately, as we have said before in our daily updates, the current situation is unprecedented, and as such, only one thing is currently for sure: volatility is never more than a headline away – and as a consequence volatility is the new ‘normal’.
However, we believe these large swings are irrational and simply emotionally-driven and while we fully appreciate that they are unnerving, it is very important to maintain a long-term perspective and resist the urge for any knee-jerk reactions. Equity markets hate uncertainty – and the coronavirus outbreak is a big uncertainty.
The coronavirus outbreak will subside and the stimulus measures that governments and central banks have provided (and are likely to increase further) will allow confidence to return and equity markets to recover.
It hasn’t just been global equity markets that have been volatile: oil markets have been as well (no pun intended).
Following a breakdown in talks between OPEC (the Organization of the Petroleum Exporting Countries) and Russia over production cuts during March, Saudi Arabia started what is seen as an oil price war with Russia, as they announced that they would significantly increase production in order to increase their market share – however, in reality, both Saudi Arabia and Russia want to eliminate the US shale producers.
Saudi Arabia is the main influencer of OPEC and was, until about five years ago, the main swing producer and price manager, and as such would, historically, scale back production when prices fell and increase output when prices rose. However, this role was effectively surrendered back in 2014 due to the US shale revolution, as the extent and speed of the US oil resurgence surprised and weakened the cartel.
By flooding the market with oil at a time when demand is rapidly diminishing, Saudi Arabia has pushed the price of a barrel of Brent down from roughly $70 in January, to a fraction over $20 a barrel yesterday.
However, today the oil price has jumped over 10% after China said it would buy oil to bolster its strategic reserves.
Although a 10% move may sound large, it is immaterial given that it is still a long way down from where it started the year – and with Florida and Pennsylvania joining the list of states ordering people to stay at home, the supply glut (and as a result low oil prices) are, in our opinion, here to stay for the foreseeable future.
In normal circumstances, we would be jumping for joy as we would view this collapse as positive, given it is the equivalent of a massive tax cut for users. For example, global oil consumption is ‘normally’ approximately 100m barrels a day – and as the cost of a barrel of Brent has declined by nearly $50 since the start of the year, this would, in normal circumstances, roughly equate to $5bn of stimulus per day – (which is a massive $1.8tr per annum).
Unfortunately, it isn’t currently helping as demand has dropped well below the normal 100m barrels per day as we are all unable to take advantage of it given the lockdown restrictions!
Investment Management Team