Market Update – 21st April 2020.

West Texas Intermediate (WTI) fell below $0 last night for the first time ever – and at one point WTI traded at -$40 (yes, negative $40), which effectively meant that buyers were being paid to take delivery of the oil.  After closing last night at -$37.63, down $55.90 on the day, the price has made a stunning recovery this morning and, as we write, is currently up nearly $38 – so is trading around $1 a barrel.

While the dramatic price move made the headlines, in reality it’s a bit of an inaccuracy.

The price fall related to WTI for delivery in May, which is a contract that expires later today – and obviously no one wants to be left holding the contracts at expiry as they don’t want to take physical delivery of it as there is simply nowhere to put it, as storage tanks are close to full capacity.

Yes, to see a negative price is very strange, but in reality it is a technical quirk as the price for a longer dated delivery of WTI, say June 2020, ended yesterday at $20.43 (down $4.60) a barrel, while oil for delivery in December traded around $33 a barrel.

Additionally, the price of Brent, which is the much more widely traded benchmark, ‘only’ fell 8.94% to $25.57 a barrel.

However, this very strange US WTI price movement does suggest to us, as we speculated earlier this month (please see here), that Saudi Arabia’s oil price war with Russia, was in reality aimed at eliminating the US shale producers.

Furthermore, as we have been saying recently (please see here for our last detailed comment), we believe that there is obvious trouble ahead for oil given the supply glut, as demand has disappeared due to the coronavirus lockdowns.

Consequently, rather than seeing the lower oil price as a negative, it should be seen positively as when the lockdowns are lifted it will be a big benefit to consumers and companies (as it is the equivalent of a tax cut), and as such we see this as another reason why the global economy will have a V-shaped recovery.

Although the oil price fall has triggered a gloomy mood for European equity markets this morning, as we have previously warned, the path for financial markets is unlikely to be smooth and we fully expect market volatility will remain elevated in the short-term.  However, it is important to resist the urge for any knee-jerk reactions and maintain a long-term perspective by looking past the negative news headlines we are currently seeing.

Investment Management Team