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US crude oil prices slip to a 21-year low

CMC Markets

Further easing measures from Chinese authorities, along with optimism that lockdown measures will continue to be eased in the face of additional falls in coronavirus infection and death rates, has helped European equity markets get off to a positive start this week, despite a lack of enthusiasm on the part of Asia markets.

Asia markets have been a little weaker today, though this weakness does have to be set in the context of closing at one-month highs on Friday. Last week saw global stocks gain strongly on optimism that a coronavirus treatment study might result in the beginnings of a tangible medical response to the Covid-19 pandemic sweeping the globe, though the rise in European markets has lagged somewhat behind the rebound seen in US markets. This lag probably has a lot to do with the slightly more temperate response from the European Central Bank policy wise, but also a realisation that even if lockdowns are eased, it’s hardly going to be normal service resumed, something US investors appear completely oblivious to at the moment.    

This resilience is all the more surprising in the face of tsunami of economic data that has seen unemployment rates soar, while global trade has more or less ground to a halt. This morning’s Japanese trade numbers for March showed exports fell 11.5%, with the declines particularly notable in the US and Europe. These falls were worse than expected and came despite the fact that the lockdowns came towards the end of March. The April numbers are likely to be much worse given that the lockdowns are, unlike March, likely to cover the whole month.

The current optimism and resilience also comes in the face of a collapse in oil demand that has seen crude oil prices sink like a stone in the past few weeks. US crude prices have fallen further this morning hitting their lowest levels since 1999, below $15 a barrel.

Last week US banks, in a sign that they were concerned about the economic impacts of the lockdowns on US consumers, set aside over $20bn in respect of loan loss provisions, in a sign that the huge rise in unemployment could set off a wave of consumer defaults on mortgages, car loans, and credit card debts.  

In company news, a rise in sales of French Fancies and Cherry Bakewells has seen Premier Foods, the brand behind Mr Kipling cakes, upgrade its guidance for full-year trading, saying that sales would be at the top end of expectations after a 10.5% rise in March. This has seen the shares rise over 20% to three-month highs.

DFS Furniture has also said that it is in advanced negotiating an additional debt facility of between £60m and £70m on top of its existing £250m. Redrow Homes also announced this morning that it had secured an extra £100m of additional funding under its revolving credit facility, taking the amount of headroom it now has to £350m.

Brewer and pub chain Marstons shares have edged higher this morning after securing a waiver from its bankers HSBC, which will allow it to suspend its business for 30 days, without sparking a default. Aston Martin shares have taken a leap to the upside on reports that Mercedes F1 boss Toto Wolff has taken a small stake in the business, of 0.95%, once the rights issue has been fully priced.

The collapse in US crude oil prices relative to Brent has seen the spread between the two grades widen to the widest since early 2015, when the gap was nearly $13 a barrel. The collapse in US crude prices to levels last seen in early 1999, has prompted speculation that the US may well bail out the shale industry in the face of a collapse in demand, and a lack of storage capacity, as stockpiles continue to rise sharply, amid fears that some US shale producers could go bust.

While OPEC+ have already agreed to a cut of 10m barrels a day, the global collapse in demand of over 20m barrels a day will likely overwhelm the weaker members of the US shale industry which has breakeven prices of over $40 a barrel.    

The collapse in prices has also prompted some speculation that the US administration might look at paying oil producers to keep oil in the ground, and help stave off the bankruptcy of some of the smaller producers, which would saddle several US banks with large losses.

In an election year this is likely to be a huge temptation for President Trump, however even he has to admit propping up unprofitable companies only delays the inevitable, and wouldn’t solve the underlying problem of a lack of demand, and the global move to renewables.

The US dollar is looking slightly better bid this morning, particularly against the Norwegian krone and Canadian dollar, largely on the back of the weaker oil price.

The pound is also on the back foot a touch as the next phase of the governments bailout package for small and large businesses gets under way today, with the launch online of the latest business interruption plan. The plan will pay out 80% of salaries up to £2,500 a month for April, May and June, though some businesses are calling for this to be extended, or tapered beyond the end of that date.

US markets, on the other hand look set to open slightly lower, not altogether surprising given some of the euphoria seen at the end of last week, with the slide in oil prices probably acting as a drag. We’ve seen a decent rebound from the lows in the past few weeks, led predominantly by the Nasdaq which has managed to recover its losses for this year, closing back at levels last seen in early March.

 


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