Morning Commentary: Less Than Free

Foreign Exchange - Morning Commentary
Less Than Free
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
For the first time ever, WTI future crude prices went negative as it fell nearly 300% to ~$-40.00 (no that isn’t a typo) during yesterday’s session.  For today’s session, May WTI prices have retraced some of its losses but remains in negative territory.  What this means is that the owner of the May WTI contract would be paid money to take delivery of oil.  

To be sure, the low price of oil reflects how oversupplied the US market is as a result of the sharp drop-off in demand due to distancing measures.  However, there is more at play than simply the intrinsic value of oil as the June contract remains in positive territory.   

As fundamental as it sounds, the owner of oil has to store it somewhere and storage units are quickly running out.  Even offshore options have become exponentially expensive with the average day rate for a very large crude carrier (VLCC) on a six-month contract sitting around $100,000 versus about $29,000 a year ago.  The dynamic where it is both financially and environmentally prohibitive to stop production as well as issues around where to store oil has resulted in negative prices as supply exceeds demand and traders are desperate to avoid taking physical delivery of oil.   

However, when you look out further along the delivery horizon, oil prices still remain positive as traders bet on a rebound in economic activity once we make it past the current COVID-19 induced halt in activity.  Over the past 4 weeks, ~50 long term contracts for VLCCs have been signed with the majority of them flagged for long term storage as they were leased without a discharge location. 

To me, the June futures contract is more representative of the “value” of crude although there are signs that these contracts are also beginning to be affected by storage concerns.  Clearly, these are unusual times with unprecedented events leading to unprecedented scenarios and I, for one, hope those crude oil traders betting on a rebound in economic activity are correct. 
  • The US may put as much as 75 million barrels of oil into the national reserve as well as look into stopping imports from Saudi Arabia.  Additionally, Texas is considering mandated cuts with the US and Canada discussing coordinated action.  
  • A $500 billion rescue package is expected to be passed by the Senate today.  If there is a unanimous vote, the Senate can pass it in a pro forma session.  The House is expected to consider the bill on Thursday but will likely require a recorded vote as objections are expected. 
  • President Trump tweeted that he is considering signing an executive order to temporarily suspend immigration to the US in order to protect American jobs for US citizens as the novel coronavirus has hit the US economy hard.  No further specifics were given.   
  • Central bank balance sheets are expanding to record levels.  For the month of March, G7 central banks have purchased ~$1.4 trillion of financial assets.  The Fed alone is currently buying $41 billion in assets daily.  Once the dust settles, it remains unclear how or if central bankers will be able to unwind their purchases as history has shown a difficulty to slow, let alone reverse them. 
  • The UK reported its latest jobs report with the unemployment rate rising to 4.0% from 3.9% previously.  Markets have not reacted much to this number as it is outdated with lockdown data showing up in next month’s report.
  • The Hong Kong Monetary Authority (HKMA) took steps to defend its peg for the first time in 4 years as the interest rate differentials between USD and HKD deposit rates have put the peg under pressure following Fed rate cuts.  The HKMA has unlimited HKD to inject so, in theory, the peg should not break. 
  • Conflicting headlines have emerged around the health of North Korean President Kim Jong Un’s health with some reports indicating the leader is in critical condition after surgery. 
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