Crude Oil and Coronavirus Pandemic: Oil Futures in Negative and How Machines are Reading it?
Monday, 20th April was a historic day for Crude Oil Industry. But, not in a good way. The May US oil futures contract in went into negative territory for the first time in history. The US reserves are full and there is simply no place to put the crude and everyone is avoiding taking delivery of physical crude. Finally, they were at minus $37.63 a barrel, a decline of $55.90 a barrel. Prices also set a historic low of negative $40.32 during the day.
But it is not just a storage problem. While that may be an issue for May contract, the bigger and more fundamental and structural concern is on demand. The global oil demand is down more than 30% due to the coronavirus pandemic and the lockdown in several countries and the June contract also ended down 16% to $20.43 a barrel. While this is in positive territory, a 16% decline is huge and the prices are low in absolute terms as well.
There is limited visibility as of now on when the demand will recover and this is putting a huge pressure on producers who are still bickering on production cuts. For many of them, Oil Exports is a significant part of their revenues and they can’t seem to easily agree on who needs to cut how much of production to bring back some stability in prices. The less demand and low crude prices actually made some of them more desperate in their attempts to increase production and gain market share.
This is also visible on EMAlpha Oil News Sentiment tracker as well. While the market movements like Monday’s are related to specific reasons like storage issue, the general sentiment on the demand side is extremely negative. As you would probably notice from the chart, this is at the lowest levels after the impact on sentiment seen during the dip in March because of supply glut expected as a result of price war between Russia and Saudi Arabia.
Fig. 1: EMAlpha Oil News Sentiment
Should we equate this with what could happen in global economy and other financial markets worldwide? No. Not really, At least immediately. One is that the May Futures in negative was more related to specific challenge associated with how to take delivery when there is no storage. Second, the impact on oil demand is already factored in to some extent and markets are not pricing in a big recovery in short term. Third, for some countries which are net importers like US, China India, it will be a mixed impact with some positives along with negatives.
There are two more charts which will support what we are saying. The first is SAUDI Aramco’s stock price. The biggest and most profitable Oil Company in the world is under stress but either because of very low liquidity or less market focus on what happens in next few months, the stock price is largely doing fine. The other thing could be that probably because of timing differences between US markets and TADAWUL (Saudi Exchange, where Aramco is listed), there will be much more impact on Tuesday session.
Fig. 2: Saudi Aramco Stock Price (Source: Google)
The other is S&P 500. It fell yesterday but considering whatever has been happening on volatility in the markets over last few months, the fall was by no meansexceptional. This implies that markets are less worried and the concern is limited to Oil only. But it is surely interesting and we need to keep an eye on this.
Fig. 3: S&P 500 Chart on 20th April 2020 (Source: Google)
Research Team
EM Alpha LLC
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About EMAlpha:
EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.
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