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Photo: Bloomberg |
The coronavirus pandemic has caused a series of large-scale distortions in global financial markets, but on Monday the pathogen caused the biggest stir so far: the price of the US benchmark oil index WTI fell to minus $ 37.63 per barrel.
This means that if you could buy 1,000 barrels of oil at a center in Oklahoma with delivery in May, you would have to pay $ 37,630 to get the amounts mentioned in the futures contracts.
Of course, you need to think ahead of time if your basement is large enough to store the 1,000 barrels in question, which equates to about five tankers, The New York Times writes.
There are two ways of looking at this phenomenon. The technical point of view must be seen first. The collapse of WTI futures delivery in May shows how the impact of the coronavirus crisis is spreading to all markets, forcing them to react abnormally.
It seems increasingly acceptable to affirm that the crisis caused by the proliferation of COVID-19 is causing a great deflationary shock in the economy, creating an idle situation with a large proportion of producers of essential resources worldwide.
The shortage of various products, such as face masks or toilet paper, should not confuse the problem. The effects of the market will continue to cast a shadow on the economy after the end of the extraordinary measures imposed by governments around the world.
When you read a news article or hear an economist mention the price of oil, it generally doesn’t mean a physical barrel full of crude oil, but the price of a futures contract traded on the Chicago Stock Exchange, for example. By agreement, the “oil price” is the price per barrel reflected in a futures contract for next month’s delivery.
Many large companies trade these futures without giving too much thought to these physical details. Speculators speculate, companies hedge their price change risks, and transactions take place at the abstraction level on a computer screen.
But as each contract ends, financial speculators sell their contracts to “real” oil buyers like refiners.
However, the current situation poses serious problems for traders who cannot sell the quantities already ordered to legal entities to physically use the raw material.
Demand for petroleum products has decreased in the past six weeks. In the context of large-scale landing, airlines need less jet fuel. People do not drive, so they need less gasoline.
But oil producers are failing to cut production as fast as demand, which means there is a huge oversupply in oil markets. All of the usual storage sites are full and therefore negative futures prices are coming for the market to clear.
The economic impact of the pandemic is first and foremost a sudden interruption in demand. There may be several products where deficiency is a problem, including medical equipment, personal protective equipment, and disinfectants. But the whole picture is that A large part of the potential economic production is in the process of retention.
This includes restaurants, airlines and sports stadiums that remain empty. The economic result is also the 22 million workers who have applied for unemployment benefits in the US. USA, and more future unemployed are expected to join them.
All of this points to deflationary collapse: abundance of supplies of goods and services and, consequently, falling prices.
Oil is not the only product suffering from the collapse of prices. Corn futures have fallen 19 percent since early February. The price of US government bonds. USA Protected against inflation suggests that inflation will be at an annual average level of only 0.56% for the next five years.
The good news is that capacity will not go away overnight. Oil will remain on the ground once the economy begins to recover; the unemployed will be eager to return to work; Stadiums and restaurants will be full. But the more the economy freezes, the greater the risks of lasting damage.
In the oil market, even assuming that negative futures for May delivery futures can be seen as a strange aberration, a deeper lesson can be learned. The sharp increase in US energy production. USA In the last decade it has exceeded the needs of the world.
The economy is demand and supply, production and consumption. The question of a post-pandemic economy is whether this balance, once lost, can be quickly restored. This will be much more complicated than finding more places to store crude oil.
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