Overnight: Oil Price Turns Negative

By Greg Peel

Risk Off

At some point the ASX200 was going to have to fall back. Most recent strength had been driven by the excitement of the Australian economy getting close to a gradual reopening, but then the 25% rally off the March 23 low to Friday’s close was already pricing in such an outcome, and probably too much so. We are yet to really experience the economic fallout.

The ASX200 made a choppy start yesterday, unable to gain any traction despite a 700 point rally in the Dow on Friday night. Traders know that if markets won’t go up, it means they’re about to go down. And so they did from 11am.

The ABS released a survey yesterday on the impacts of the virus on Australian households, which may or may not have triggered the selling, or at least the excuse. The Bureau found the number of people with a job fell by -3 percentage points to early April from early March, and that while 12% still with a job were working longer hours, -24% were working fewer hours.

The survey also found 98% of us are practicing social distancing and 88% are avoiding public spaces altogether. Two thirds remain concerned or very concerned about their health. 52% of adults changed their travel plans in March.

It’s not knock-me-down-with-a-feather stuff, but perhaps an excuse for the local market to drop back from its exuberant highs. I think the clue was in a trend over the last couple of days of last week to switch out of outperforming consumer staples and into underperforming consumer discretionary stocks in anticipation of “back to business” when, as noted, the index had already bounced 25%.

But it wasn’t until late in the session that someone pointed to the Nymex WTI crude price. It was heading south in a hurry and by the close had fallen around -20% to below US$15/bbl.

The energy sector thus closed down -4.6% to be the worst performer on the day. Next worst was previous outperformer healthcare, down -3.1%. Thereafter, falls were a pretty uniform -2-3% but for IT (-0.7%) and staples (-1.1%).

After so much talk from experienced investors that there would simply have to be a second pullback, eventually it had to become self-fulfilling.

At the very least, the market needs to work through a period of consolidation, perhaps for weeks, ahead of any thought of returning to prior all-time highs once the virus fear has eased.

There were few particularly notable moves among individual stocks yesterday. Southern Cross Media ((SXL)) had been on a flier since its capital raise but it fell -9.7% to be the worst index performer yesterday. Estia Health ((EHE)) rose 8.4% on Friday and fell -8.7% yesterday.

Caltex ((CTX)) fell -7.8% after its suitor decided to temporarily pull its bid for the company until the virus threat eases.

But by last night, all talk was of oil.

Say What?

At its lowest point last night, WTI crude was trading at -US$40.32/bbl, yes, minus, down -320% from the prior settlement price. The price later rebounded and this morning was at -US$13.1/bbl, down only -172%.

Note that oil trades electronically 24/5, and while each day a “closing” price is set mid-afternoon US time for settlement purposes, FNArena takes a later “snapshot” each day at 7.30am Sydney time, which is the price in the table below.

How, I hear you think, can an oil price be negative?

That’s a question that requires an answer too lengthy for this morning report (and its deadline), so FNArena will later today publish an article explaining just how this can happen.

For the meantime, understand that the global benchmark “oil” price is the West Texas Intermediate futures price, not a spot price. The front month contract, for delivery in May, expires tonight. There is no storage available in the US. If you are long a WTI futures contract you must take delivery of physical oil, or sell your futures position into the market before expiry to close out for cash.

If it’s going to cost you more to store that physical oil than what you’d get for selling it, or if you can store it at all, then it makes sense you would effectively pay someone else to take the problem off your hands. Thus – negative oil price.

To put the negative WTI price into perspective, note (1) the WTI June contract, which will become the front month after tonight, has fallen only -15% to US$21.22/bbl (that’s plus), and (2) the Brent price, which these days is considered the global benchmark in reality, and has already rolled forward into a June delivery contract, has fallen only -7.5% to US$25.25/bbl (also plus).

Clearly there’s still some storage available in Scotland.

It’s also worth noting that the share price of America’s biggest oil producer, Exxon Mobil (Dow), fell only -4.7% last night.

Beyond oil, it did not go unnoticed on Wall Street last night that some countries around the globe are now considering a gradual lifting of restrictions. We’re one of them, New Zealand has already made it official, and Germany is about to do the same. Germany sort of wins global in economic terms.

Wall Street is also continuing to keep a watchful eye on what appears to be a flattening curve in New York City.

But oil took centre stage, along with a level of frustration that Congress failed to agree on a second SME assistance package to back up the initial US$350bn that was gone in sixty seconds.

While one might assume a lower oil price (and don’t think for a second your local servo is about to pay you to fill up) is positive for all of the economy bar the energy sector, the issue is, and has been for some time, one of highly leveraged small US producers going bust, potentially sending smaller regional banks that have lent them the money going bust, and possibly triggering another credit market event. Although we can assume the Fed has that covered.

The other issue is of course the thousands of Americans employed by the energy sector, and what happens to their jobs, particularly at this time.

The good news, if you like, is that the negative oil price can only reflect one thing – speculators getting caught out. While the world might simultaneously be in under-demand and over-supply, the price of physical oil (and to that matter, the price of LNG indexed off the crude price) is not going to go negative.

Commodities

Enough said.

The currency of major LNG producer Australia is down -0.5% at US$0.6333.

Today

The SPI Overnight closed down -53 points or -1.0%.

The minutes of the April RBA meeting are out today and Philip Lowe will speak.

BHP Group ((BHP)) is an oil producer. It delivers its quarterly report today.

Asaleo Care ((AHY)) is no longer a toilet paper producer. It holds its AGM.

The Australian share market over the past thirty days…