European shares were weaker again as crude oil came under more pressure and virus restrictions seem set to last for a long time. Crude oil dipped below $20 and made a fresh 18-year as the complete collapse in demand due to the coronavirus combined with the OPEC-led supply/price war create the perfect storm for prices.
As I noted two weeks ago: ‘The combination of a massive supply surge from OPEC and a complete collapse in demand create conditions in the market which are the most bearish imaginable. I think we see WTI under $20 before long as the build-up in crude stocks is just going to be massive. The amount of spare supply on the market in the coming months will be scary and crude prices will fall further.’
The thing to stress is that we simply do not have any idea when demand will recover – it could take months to get back to some semblance of normality. And just as this is happening the Saudis are opening the spigots. It’s getting to the point where we run out of places to store the oil. The contango spread is getting to levels not seen before for Brent, whilst for WTI it’s the widest since 2009. WTI touched on a low at $19.92 in early Asian trade before recovering the $20 handle and is currently trying to figure out which way to move out of this $1-range between $20 and $21.
And to hammer home just how bad is the demand collapse, EasyJet has grounded its entire fleet and said it cannot give a date for when flights could restart. At this rate the level of supply coming off the market in the coming months will be huge – shale output is about to be drastically curtailed - but it will take a long time for this to filter through to prices.
European stocks were weaker with crude on the open on Monday. Lower crude is generally suggestive of lower risk appetite. The FTSE 100 moved about 1.6 per cent to the downside after half-an-hour’s trading with futures rejecting a move to 5600 ahead of the cash open. US futures have turned lower. Last week was a positive story but there is something of a Monday-morning hangover feeling about this one – it could take a couple of days to shake.
Cooler heads prevail: President Trump has been forced to walk back his desire for the US to reopen by Easter, extending national social distancing rules to Apr 30th. This came as the top US expert Dr Anthony Fauci said as many as 200,000 Americans could die, whilst the US death rate doubled to more than 2,100.
In Britain, virus restrictions could last for 6 months, but it’s not all grim. Neil Ferguson, the leading epidemiologist, says this morning that there are early signs of a slowing in the spread of coronavirus evident in the UK and that ‘game-changing’ (according to Boris Johnson) antibody tests will come in days, not weeks.
The European data sheet is pretty bare today but German CPI inflation is due on the wires over the course of the morning.
Neil Wilson is chief markets analyst at Markets.com
