Crude market crisis keeps traders on edge as equities sink again

With demand virtually non-existent owing to virus lockdowns, and production still high despite storage at bursting point, crude markets have been sent into freefall with WTI for May delivery diving to minus $40 on Monday.

Focus has turned to the June contract, which was faring slightly better but still lost almost half its value on Tuesday, while Brent collapsed by a fifth.

In early trade on Wednesday, WTI bounced 20 percent but was unable to maintain all the gains, while Brent went into reverse.

The crisis in the oil market caused by coronavirus was compounded by a price war between Russia and Saudi Arabia, but while they drew a line under the row and joined other key producers in slashing output by 10 million barrels a day, that has not been enough.

Crude’s rout “merely reflects the underlying theme that there is no demand for physical oil, and there is nowhere to store it”, said AxiCorp’s Stephen Innes.

“Disappointment following the new (oil cut) agreement continues to resonate, and responding to that outcry could be the one thing that turns the oil price around in the near term, absent evidence of demand recovery.”

Equity markets, buoyed in recent weeks by trillions of dollars of stimulus and signs of a slowdown in the global rate of virus infection and death — and moves to slowly ease lockdown measures in some countries — are beginning to feel the spillover from the crude collapse.

Investors fear the rout could compound an expected deep global economic downturn.

Innes added that the oil crisis “has negative connotations for other areas of the market, most notably banks, given their high exposure to US shale producers”.

– ‘Reality check’ –

Asian markets continued the week’s retreat, tracking another day of heavy selling in New York and Europe, though the losses were shallower.

By the break, Tokyo was down 1.2 percent while Hong Kong slipped 0.7 percent and Sydney fell 0.5 percent.

Shanghai was 0.1 percent off while Seoul, Singapore, Manila and Wellington all lost more than one percent.

“The oil reality check has triggered a reassessment across risk assets with the global equity board a sea of red,” said Rodrigo Catril at National Australia Bank.

Adding to the sense of unease on trading floors is uncertainty around earnings season, with many firms struggling to provide forecasts as they try to assess developments in the pandemic, which has shattered their bottom lines.

“There’s no way you can predict earnings right now,” Michael Cuggino, at Pacific Heights Asset Management, told Bloomberg TV. “It’s virtually impossible until we have more visibility with respect to how the world comes out of the coronavirus on the other side.”

In Hong Kong, the de facto central bank stepped in to sell the local dollar for a second successive day to defend its peg with the US dollar.

The Hong Kong Monetary Authority sold HK$2.79 billion ($360 million) of the unit, which has strengthened in recent weeks owing to near-zero US interest rates and higher borrowing costs in the city as investors look to buy into its stock market.

The move came a day after it sold HK$1.55 billion, which marked the first intervention to offload the local unit since 2015. It last intervened to buy the currency in March last year.

Under the city’s Linked Exchange Rate System, the HKMA is required to buy the local currency at HK$7.85 to US$1 to ensure exchange rate stability.

The financial hub has maintained a decades-old peg with the US dollar, which keeps Hong Kong at the mercy of Fed policymakers.

– Key figures around 0300 GMT –

West Texas Intermediate (June delivery): UP 11.6 percent at $12.91

Brent North Sea crude (June delivery): DOWN 2.0 percent at $18.94

Tokyo – Nikkei 225: DOWN 1.2 percent at 19,050.33 (break)

Hong Kong – Hang Seng: DOWN 0.7 percent at 23,634.37

Shanghai – Composite: DOWN 0.1 percent at 2,825.42

Euro/dollar: DOWN at $1.0855 from $1.0859 at 2030 GMT

Dollar/yen: UP at 107.82 yen from 107.77 yen

Pound/dollar: DOWN at $1.2289 from $1.2301

Euro/pound: UP at 88.34 pence from 88.27 pence

New York – Dow: DOWN 2.7 percent at 23,018.88 (close)

London – FTSE 100: DOWN 3.0 percent at 5,641,03 (close)