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The collapse of oil prices is a warning. Anyone who has been dragged along by the recovery in the stock markets since the end of March would be foolish to ignore it.
Even by the standards of the last few months in the markets, the magnitude of the oil drop has been impressive. For the first time on Monday, it turned negative. Having started the day at about $ 10 a barrel, prices at West Texas Intermediate, the United States benchmark, linked to black material delivery in May, dropped to minus $ 40.
That means there is so much oil spilling, so little demand in a closed global economy, and so little space to store it, that sellers are paying buyers to take it out of their hands.
Optimists were quick to argue that this is just a market technicality. Short-term storage issues are simply pinching this particular contract in this particular part of the world, they said. They noted that it is not unusual for so-called first month prices to drop below the cost of oil to be delivered at a later date. In other words: nothing to see here.
But that seems the equivalent of financial markets to argue that the coronavirus is “just the flu.”
A barrel of oil that changes hands at $ 40 is simply not normal. What’s more, oil prices for delivery at other times of the year, and from other parts of the world, are now falling as well. WTI prices for June delivery dropped as much as 40 percent on Tuesday. It turns out that the world doesn’t want that oil much either.
This is an alarm call. Since the end of March, the stock markets and the riskiest parts of the bond market have rebounded, dragged out of the depths of despair by strong central banks. The US Federal Reserve USA He has vowed to buy a wide range of bonds and is even supporting the high yield debt market. This reduces bond yields and encourages investors to increase equities, which they have done properly. However, the Fed is not buying oil.
It is perfectly reasonable to buy stocks on the basis that the Fed backs it, and most fund managers would agree that central banks have managed to neutralize threats to the financial system itself. But any idea that this is an organic recovery, that businesses and economies are going through the worst and back to normal, seems wrong.
Yes, as some brave and optimistic investors are eager to point out, the slowdown in the spread of the virus in some parts of the world is encouraging. But by itself, it’s not encouraging enough to support a 26 percent jump in the S&P 500 benchmark index for US stocks in the past month. As Peter Oppenheimer, head of global equity strategy at Goldman Sachs, warned this week: “This rebound in the equity markets is likely to be too rapid, and there are likely to still be downside risks from here.”
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Falling oil is one of the simplest and cleanest ways for the markets to say that the global economy is in deep distress and that manufacturers, airlines and households do not expect to return to business any time soon.
In turn, this suggests that investors remain overly optimistic about the speed and strength with which companies and economies can recover from blockages designed to keep the coronavirus at bay. After all, the S&P is now back to where it was last June.
“The second quarter is going to be terrible for earnings,” said Karen Ward, chief market strategist at JPMorgan Asset Management for Emea. “We believe that the market is still a bit optimistic. . . That’s what worries me “.
Anyone who keeps buying the dip in risky assets, and refuses to listen to the argument of another lower leg, should hear the thud of oil dealers hitting their heads on their desks.
