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Black gold barely survives Black Monday – Market Analysis – April 20

Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
History in the making for global Oil markets, futures contracts first time in negative price territory

The event of the day has been, without a doubt, the spectacular collapse of the price of Oil. 

The culprit has been the WTI (West Texas Intermediate) futures contract with expiration in May that has dragged down the cost of almost all physical Oil in the United States.

WTI futures contract May ended at -34.88$, the first time in history that a future Crude Oil was trading negative, and the price of physical crude Oil has also reached levels ranging from -49.63$ in the case of Alaska North Slope to -18.63$ from Heavy Louisiana Sweet.

The leading cause of this dysfunctional behavior is the excess of Crude Oil in stock due to the enormous drop in demand and the lack of storage capacity. Given the proximity of the expiration of the contract and the inability to cope with the delivery of the underlying asset, the sale has been forced and massive until reaching negative prices.

This enormous downward pressure has affected the rest of the futures contracts, although evidently not proportionally. 

BrentOil was trading until $25.28 near the last low levels of $24.28. The general opinion of the market is that as long as the supply and demand conditions do not change, crude will continue to press down.

This is the technical explanation of an unusual market movement that contradicts economic rationality, but behind there lies a structural problem of more considerable significance that goes beyond the specific confrontation of two major producers that are Russia and Saudi Arabia. The colossal drop in demand caused by the coronavirus crisis that will lead to collapses in the GDP of the leading countries of the world is not yet clearly reflected in the stock markets.

Part of the reason for the resilience of the stock markets is the good behavior of technology stocks that are initially favored in the current circumstances, such as Netflix and Amazon, and the hope that the economic support and stimulus packages that the American government provided are going to be enough to avoid a chain of bankruptcies. But the magnitude of the crisis is still unmeasurable, and its effects will not only be seen on the supply side but also on that of domestic consumption, which will be depressed for a long and still unknown period. 

This situation will not be local but global in nature, so the uncertainty as to when and how a recovery will occur is even more considerable. 

If this were not enough, everything indicates that a large-scale confrontation can take place between the two great powers, the US and China, say market analysts.

Global indices

We have learned that the US Senators unveiled a bill to hold China accountable for coronavirus. 

If the so-called "trade war" led to increased risk aversion with falling stock markets for fear of a substantial loss in the global volume of trade, a direct political confrontation plus the slowdown effect of the crisis should raise uncertainty global at maximum levels and risk appetite would be greatly reduced. 

This reasoning is shared by a large part of the leading investors in the market. However, there are still those who expect a rapid recovery, and this bipolarity is undoubtedly one of the reasons why the stock markets have not yet suffered significant losses.

USA500 has fallen during the session mainly due to the tension caused by the Crude Oil market, and it needs to break below 2,784 to resume the downtrend that started at the beginning of the crisis. The economic data that will be published will be relevant in this regard, the PMIs of Europe and the United States are to be published, which will give us a more unambiguous indication of the state of the economy.

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.