Dizzying drop in oil prices; SEB's chief commodities analyst explains
On April 20 the price of West Texas Intermediate (May 2020 futures) took a dive into negative territory for the first time ever, reaching USD -40/barrel before rebounding to slightly positive levels again on April 21. The WTI price collapse reflected a combination of tumbling near-term demand and an acute shortage of oil storage space in the United States, as well as financial positioning – with market players prepared to pay to get rid of their oil right now, to avoid the risk of not being able to store it upon physical delivery. As a comparison, the price of WTI oil futures for June delivery fell to around USD 12/barrel on April 21, while Brent crude – the main oil price benchmark in Europe and elsewhere – is trading around USD 17 this morning. Our Oslo-based chief commodities analyst, Bjarne Schieldrop, expects new verbal actions by both OPEC+ oil-producing countries and US President Donald Trump, but in a situation where production cuts are not enough to offset the global oil surplus, downward price pressure is likely to persist. Falling oil prices add to a highly uncertain inflation picture. Mr. Schieldrop explains the WTI oil price crash in its context: Video (6 minutes).
Small steps towards easing the lockdowns, and more crisis packages
A number of countries are taking small steps towards easing their coronavirus-related lockdowns. Combined with indications of falling COVID-19 death figures in many European countries and the US, this is supporting financial markets. Another important reason behind relatively strong stock markets is probably also powerful stimulus measures by both central banks and governments. US congressional Democrats and Republicans say they have agreed on a new fiscal package aimed at helping small businesses pay their employee salaries in the coming months, totalling about USD 300 billion on top of the USD 350 billion included in the giant stimulus package enacted in late March.
Weak macroeconomic data and report season
Many observers are nervous about corporate quarterly earnings reports, which have begun in the US and elsewhere and will be published this week by major Swedish companies as well. In the current economic environment, there are many signals confirming the abrupt decline in growth that is now under way. The COVID-19 crisis has primarily hurt the service sector, but as US statistics have shown, manufacturers will also be severely affected. As expected, the number of jobless claims keeps climbing. A total of 22 million people in the US have applied for unemployment insurance benefits during the past month. Probably not all these applicants will remain unemployed, but the figures indicate that the US jobless rate may reach 10-15% in the coming months.
After a quarter-on-quarter drop of nearly 10%, China's gross domestic product (GDP) fell by 6.8% year-on-year in the first quarter of 2020. We are currently sticking to our forecast of 4% Chinese growth this year but we see clear downside risks, since the recovery in consumption seems to be lagging, while global lockdowns will adversely affect exports.
Our market outlook
Indications that the spread of the novel coronavirus has been slowing in recent weeks has shifted the focus of attention away from how large and rapid lockdowns are needed towards how quickly countries and their economies can re-open. Together with continued signals of further stimulus measures, this has helped pave the way for a return of risk appetite in financial markets. Stock markets have now regained about half of the downturn since their February peaks. The trend is largely similar for corporate bonds.
The fact that a return to a more normal situation is discernible − combined with unprecedented fiscal and monetary stimulus measures that have provided support during the downturn − will probably drive the coming recovery. This undoubtedly justifies a rebound in share prices from their sharp declines during March. But the scale of this rebound is a source of concern.
The dramatic economic slowdown undoubtedly means that corporate earnings forecasts for 2020 will be revised sharply lower. At present, the market is forecasting a decline of nearly 20% in earnings levels, but further downward adjustments can probably be expected. Most observers, including us, expect earnings to regain a lot of lost ground during 2021, and there will probably also be room for earnings to continue increasing after next year. But already driving up share prices towards their earlier peaks is challenging, given the prevailing uncertainties and the sizeable dips in earnings curves we are now seeing.
Decent growth prospects on the other side of the crisis, along with continued ultra-low interest rates, are laying a good long-term foundation for equities. But in the short run, share price upturns are creating the potential for new disappointments. We thus remain cautious about buying more equities at present, but given their long-term potential, any downturns are likely to create new buying opportunities.
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