Oil prices tanked once again today. West Texas Crude Oil WTI Futures June contract dropped more 13%. Most of the sell-off is mainly because of fears that the expiry date for this contract is approaching fast and there isn’t much space left for storage. The anxiety among traders is that we are likely to see the repeat of what happened with the previous month’s contract. This is the reason that we are seeing many oil ETFs, such as United States Oil Fund, LP (NYSE:USO), moving all of their positions out of the June contract to later months.
If the price of the June contract falls below $10 then the next important area of support will be $5. A further drop from that will open the door for a panic sell-off and the possibility of negative oil price may become a reality once-again—meaning you will have to pay to sell oil.
Overall, I do see fundamentals are improving to a small extent because the US shale oil rig count has dropped vividly over the last week, and it is bound to have a positive influence on supply. As for the demand side, I reason we have hit the bottom. This is because, with the easing global lockdown measures, it is only a matter of time when we will start witnessing the demand equation showing more signs of life.
Where is the reaction?
As for the equity markets, it is intriguing that we are not experiencing any momentous impact of weaker oil prices. The US and European equity markets closed strongly over the past two days, while US futures aren’t trading substantially lower. We are only seeing some minor losses for the latter. Basically, investors are entirely ignorant of the fact that oil prices at the current levels mean a chief disaster for the US shale oil industry. But, it is not an event where one can afford to turn a blind eye.
A lot of focus is on the partial reopening of the economy. Traders are hoping that consumers returning from quarantine will support the economy. The fact is that consumers aren’t in the best shape. Social distancing measures are going to keep the lid on the economic recovery for some time. Grave damage has been done to the global economy, and, despite all the fiscal and monetary policy provisions, this structural damage is going to take some time to repair. In addition, Coronavirus has altered many aspects of consumer behaviors.
Coronavirus lows to return
I still hold the view that it is likely that equity markets are going to revisit the COVID-19 low once the optimism of re-opening the economies starts to fade away.
In terms of earnings today, some prominent names with the like of Alphabet Inc Class A (NASDAQ:GOOGL), Ford Motor Company (NYSE:F), Starbucks (NASDAQ:SBUX), PepsiCo (NASDAQ:PEP), 3M (NYSE:MMM), Caterpillar (NYSE:CAT), Pfizer (NYSE:PFE), UPS, and Advanced Micro Devices (NASDAQ:AMD) are all slated to report.
On the economic docket front, consumer confidence data will be released later today and the forecast is for 88. Any number that is below the 70-mark is likely to rattle the markets, but if we see a reading that matches the forecast or slightly better than the forecast, it could provide a further boost for the equity markets.