Money for nothing and your oil for free


Market Update: 21 April 2020

As Oil continued its slide in the May contracts, touching a low of -$40.32, this is not necessarily a comment on where oil prices are going, it’s a comment on both what illiquidity can do as well as what oversupply looks like. The more traded June contracts remained in positive territory at $20.19. Again, this was a futures roll where most had already traded away to June, so liquidity wasn’t normal and Cushing storage was simply full. As we’ve mentioned, OPEC+ might celebrate cuts in supply, but demand is what counts.

Things that don’t use oil such as airlines (at present) remind us of the ramifications to industries that are at risk of closure. As Virgin goes into administration, it’s fair to say some would think this is the end of competition – but the government would be loathe to bail out a majority foreign-owned company without being able to look under the bonnet. It’s a high stakes game given jobs both of staff alongside a whole tourism industry rely on as many players in this space to help bring Australia back to the world – let alone local tourism.

Oil’s contribution can affect of course both positively and negatively countries and industries.. i.e. South Korea being a net importer will do well under these moves, the Corn industry – not so good, given half it’s produce goes to Ethanol. The US Equity market does have a stake in Oil and as such was affected by the moves, thus falling 1.8% overnight and an additional 0.6% in futures today. Pressure was also on US10yrs back down to 0.58% and put weight on AUD both as risk off, but as well the ramifications of Virgin for forward demand. AUD as low as 0.6284 today.

The PM alongside ABS data (now being released weekly) reminded us of our current predicament. 516k jobseeker claims, jobs decreased by 6% and wages 6.7%. So as parts of the world start to open, let’s hope those industries that help the economy rebound are still there or the ambitious moves in equities will certainly prove wrong.

May (CL1 in blue) vs June futures (CL2 in white)

Source: Bloomberg

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