- Loonie drops as WTI crude oil plummets to two-decade low
- Yet, rest of the market still calm – stocks near recent highs, yen and gold retreat
- Are stocks exaggerating the V-shaped recovery, or is there nothing else to buy?
Demand fears devastate oil prices
The energy market is back under immense pressure, with WTI crude falling below $15 per barrel today for the first time since 1999 as investors increasingly realize that there’s so much excess supply that storage space might run out. It seems the production cut by OPEC and other big oil producers was only enough to keep prices afloat for a few short days, as the size of demand destruction eclipses the size of that supply cut multiple times over.
Now, markets are nervous about how quickly oil storage facilities are filling up, with the fear being that storing space will run out soon unless something changes in the demand-supply equation.
In the FX arena, the ~20% intraday collapse in WTI has translated into more pain for oil-sensitive currencies like the Canadian dollar, Norwegian krone, and Russian ruble. However, the retreat in these currencies was relatively modest, possibly because longer dated oil contracts have lost much less than spot prices, indicating that this is a short-term issue that isn’t expected to overwhelm these economies.
Looking ahead, while a lot of uncertainty remains, it’s difficult to be negative on oil prices from current levels in the longer term. Demand will slowly pick up again as economies re-open, and the recent collapse in prices will likely ensure that many higher-cost producers are pushed out of business. While that might still imply a prolonged period of excess supply, the depressed prices seem to reflect that now.
In other words, crude prices will likely be higher a year from now. The question is, will WTI visit $10 per barrel first, before it recovers?
But rest of the market in a good mood
Surprisingly, the troubles in the energy market weren’t reflected in other assets. Traditional safe havens such as gold and the Japanese yen are losing ground today, European stocks opened in the green, and although futures point to a slightly lower open on Wall Street, that follows a week of solid gains.
Indeed, a lot of good news has been priced back in, with investors taking heart from signs that the worst is now behind Europe and America, allowing for a gradual relaxation of the lockdowns. Hence, many expect things will return to normal soon, setting the stage for a V-shaped recovery that’s now clearly discounted in stocks.
While all the stimulus is significant, investors might still be underappreciating how deep this recession will be and how long it will take for economies to recover. The speed of job losses in the US is simply terrifying. The unemployment rate seems to have surpassed 15% in April – much higher than the 10% peak of the last recession – and who knows how much higher it will go.
Those could take years to fully recover, especially when considering the lasting scars this crisis might leave on consumer psychology. Will shopping malls and restaurants fill up when the lockdowns are lifted, or will people ‘play it safe’ and wait, as we’ve seen in countries like China, South Korea, and even Sweden? Not to mention the risk of second waves of infections and the possibility of future shutdowns.
All this argues for a slow recovery as consumption remains soft, something that stock prices don’t seem to fully reflect. Indeed, the gains in gold, the yen, and Treasuries in recent weeks, coupled with oil’s inability to get off the floor, all suggest that traders don’t have much faith in this stock rally either.
A vaccine could be a game changer, but that’s probably not a story for the short term. Rather, the real story may be that with the Fed buying everything including corporate bonds, there isn’t much left other than stocks for investors to buy.
Finally, in Europe there's talk of establishing a 'bad bank' for non-performing loans, while in the US another $500bn rescue package is in the works. In earnings, the focus turns to United Airlines today.
