“At last, we have a deal”. These six words proclaimed by the White House in the early hours of this morning may help turn the bearish tide in the financial markets. After days of drawn out and intense negotiations, US politicians finally agreed a $2 trillion aid package to combat the Covid-19 crisis. What stands to become the largest congressional bailout in US history is well timed given that the country is struggling to contain the virus outbreak. Such are America’s troubles that the WHO said it has the potential to become the new epicentre of the coronavirus pandemic.
The prospect of fiscal stimulus sparked a historic rally on Wall Street yesterday. The S&P 500 jumped 9% in what was its strongest day since 2008. The Dow Jones closed up 11.4% as it notched its biggest rise since 1933 during the Great Depression. Yet this rebound came in spite of some dire economic data. A slew of preliminary business surveys provided an early indication of the virus-induced economic slump. A flash reading from the eurozone pointed to an unprecedented collapse in private-sector activity. The drop far exceeded that seen at the height of the 2008 financial crisis and suggested the bloc is falling into contraction. It was much the same in the US. A flash PMI revealed business activity shrank this month as the fastest rate on record. All in all, these downbeat surveys have reaffirmed a widely held hunch, namely that the global economy is heading for a deep recession.
There was one notable absentee from yesterday’s relief rally – oil. Prices initially jumped in tandem with global equities but ended the session only slightly higher. Market players fretted as the demand side of the oil equation took another hit. India, the world’s third largest oil consumer, ordered a three-week shutdown. By the close of play, Brent ended 12 cts/bbl in the black at $27.15/bbl while WTI tacked on 65 cts/bbl to settle at $24.01/bbl.
This morning, the energy complex is making additional, albeit modest headway into positive territory. A report from the API pointing to draws across the board in US oil inventories is buoying sentiment. Crude stocks fell by 1.2 million bbls last week, confounding expectations for a build of 2.8 million bbls. Meanwhile, gasoline stockpiles shrank by a forecast-topping 2.6 million bbls while distillate fuels stocks drew by 1.9 million bbls. Yet this bout of price strength is unlikely to last. After all, these gains are far from consistent with the underlying bearish forces currently at play in the oil market.
The oil market has lurched from confidence to anxiety in recent weeks. At the risk of sounding like a broken record, the twin shocks of the coronavirus outbreak and Saudi price war has made for a potent bearish cocktail. The full fallout from these developments is anyone’s guess. In short, oil is staring at a black hole of uncertainty. Small wonder, then, that market players have rushed to hit the sell button.
Brent and WTI shed almost half their value in the three weeks to March 17. A betting man would therefore expect this pullback to be mirrored by the latest speculative repositioning across the crude futures complex. And they would be right in the case of Brent, the global crude benchmark. Hedge funds slashed their bullish wagers on ICE Brent by a whopping 209 million bbls or 73% over the aforementioned three-week period. The value of speculative futures holdings in ICE Brent now stands at $2 billion compared to nearly $16 billion at the end of February. Delving deeper into the forces behind this wave of selling reveals something of interest. The pullback in ICE Brent NSL was driven by a jump in short positions. Gross shorts rose by 64% to 169 million bbls, the highest since June 2017. As a result longs now barely outnumber shorts. The ratio has plummeted to 1.46 from 6.4 at the turn of the year.
Those of a betting persuasion hoping for a similar performance on the US crude benchmark have been left disappointed. Oddly, financial players have not eschewed WTI despite its price collapse. Bullish bets on combined ICE & CME WTI were little changed in the three weeks to March 17, falling by a paltry 3 million bbls or 2%.The upshot of these contrasting fortunes is that NSL on ICE & CME WTI now exceeds that of ICE Brent for the first since November 2018. All the while, not to be outdone, producers more than doubled their net length in the US crude marker to a five-month high.
The lull in speculative selling pressures on WTI is a head-scratcher given that there are a host of localised bearish developments across the US crude complex. For starters, domestic crude inventories are trending higher since mid-January as refinery demand pulled back to a multi-month lows. Stocks have risen in each of the past eight weeks by a combined 25 million bbls All the while, US crude production is running at a record 13.1 mbpd and is expected to peak next month at 13.2 mbpd, according to the EIA. And let us not forget that the WTI futures curve is wallowing in contango. This has made it less of an attractive investment vehicle given that value is lost on rollovers.
Yet for all of WTI’s flaws, it is better positioned than Brent given the current period of global uncertainty. Brent’s international standing means it is at the mercy of the intensifying global malaise. The world economy is on the brink of a recession while the global oil balance is facing a record surplus of as much as 10 mbpd next month. This bleak backdrop will have an outsized impact on the Brent benchmark which, in turn, will ensure it continues to be shunned by the investing fraternity.