U.S. crude futures dived into negative territory for the first time in history this week amid concerns that there is not enough global storage for a market decimated by collapsing demand amid widespread lockdowns and travel bans due to the coronavirus pandemic. Brent Crude finished the week down more than 20% as demand destruction from Covid-19 still greatly outweighs any planned cuts in production. Goldman Sachs believes that global storage capacity could be full within 3-4 weeks, which “will likely create substantial volatility with more spikes to the downside until supply finally equals demand.”
OPEC and other global oil producers have committed to cut at least 9.7 million barrels per day (“bpd”) from May 1 (roughly 10% of global supply). But this may not be fast enough in a world losing between 20 million and 30 million bpd in demand.
The International Energy Agency’s monthly report for April estimated demand will bottom this month at 29 million bpd below year-earlier levels. That shortfall drops to 26 million bpd in May and 15 million bpd in June. The upside is that demand has bottomed and there should be a gradual upward trajectory in oil consumption as global economies slowly start to come back on stream. In China, the rebound is happening with morning rush hour congestion nearly back to 2019 levels.
The death toll from coronavirus reached 50,000 in the U.S., now the epicentre of the global outbreak. New York City has suffered the most, with more than 16,000 dead. Some 870,000 Americans have been infected, with about 20,000 new cases added just on Thursday. Globally, more than 190,000 people have died from the coronavirus, and case totals have reached over 2.7 million, as of Friday afternoon.
The U.S. Congress overwhelmingly passed a $484 billion spending package on Thursday as the unemployment crisis deepened. The legislation would restart a small-business loan program that was swamped by demand and allocate more money for health-care providers and virus testing.
On Thursday EU finance ministers agreed to a €500bn rescue package for European countries hit hard by the coronavirus pandemic. The main component of the rescue plan involves the European Stability Mechanism, the EU's bailout fund, which will make €240bn available to guarantee spending by indebted countries under pressure.
Eurozone business activity collapsed in April to a record low amid widespread business closures. The flash IHS Markit Eurozone PMI composite output index fell to 13.5 from 29.7 in March. A reading below 50 signals a contraction.
Most of the major global indexes fell moderately over the week as investors reacted to U.S. first-quarter earnings reports and oil prices. The Dow Jones (-1.93%), S&P 500 (-1.32%) and Nasdaq (-0.18%) were all down on the week. European markets were also weaker with the pan-European STOXX Europe 50 Index ending the week 2.74% lower, Germany’s Xetra DAX Index fell 2.07%, and France’s CAC 40 slipped 2.01%, while the UK’s FTSE 100 Index was little changed. Asian markets also ended in negative territory with both the Nikkei (-3.19%) and the Shanghai Composite Index (-1.06%) ending lower.
Market Moves of the Week
President Ramaphosa announced plans on Thursday to gradually restart the SA economy. The president said SA will implement a risk-adjusted strategy with lockdown restrictions to ease slightly from the beginning of May. Some businesses will open under strict conditions, but many of the current restrictions will remain in place, as the risk of infection remains high.
Finance minister Tito Mboweni provided no new details in a briefing on Friday on how the government plans to fund its R500bn economic support package aimed at mitigating the damage caused to the economy by the pandemic. Moody’s Investor Services does not believe the package will be enough to prevent a sharp contraction in GDP over 2020 and expects the country’s budget deficit to surge to 13.5% of GDP in the 2020 fiscal year, up from its previous forecast of 8.5%. That will push the country’s burden up by 15 percentage points to 84% of GDP, inclusive of guarantees to state-owned enterprises, it said in a report issued on Friday.
SAA’s business rescue practitioners have agreed not to consider liquidating the ailing state-owned airline and suspend consultations about the structured wind down proposal, government said on Saturday. The parties agreed to work towards a “national asset which is internationally competitive, viable, sustainable and profitable”.
The JSE all share ended the week up 0.80%, with the resource sector trading strongly over the week (+4.62%). The listed property sector continues to underperform ending the week down more than 10%.
Chart of the Week
On Monday, for the first time on record, West Texas Intermediate (WTI) May futures contract, the U.S. oil benchmark, plunged below zero and into negative price territory. WTI has a physical settlement, meaning that as the monthly contract reaches expiration, whoever holds the contract is due a physical barrel of oil. Traders, in an effort to profit from the differential, buy and sell contracts without any intention of holding them at expiration, while refiners and airlines are among those on the other side who actually want the oil. The contract that plunged into negative territory was for May delivery.
Whilst volatility is likely to continue amid current market uncertainty over the coronavirus pandemic, our message to all investors remains the same – stay calm in making decisions that are aligned with your long-term goals, not current market conditions. In any market environment, we strongly believe in the importance of having a portfolio that contains a variety of asset classes, including stocks and bonds, balanced in a way that reflects the investors risk tolerance and investment timeline.
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