Gill Capital Partners April 24, 2020 Update
Before heading into the weekend, we’d like to provide a quick summary of this week’s happenings. Coming into this week, we were beginning to contemplate a return to “normal” and discussing how to define that in today’s environment. Then, we experienced an event that was far from the Webster definition of normal: “the usual, average, or typical state or condition.” First, a little humor…
Funny/Interesting Quote/Joke of the Day
Quarantine Day 1: I am going to finally finish that book and maybe learn French…
Quarantine Day 30: I am watching videos on how to cut my own hair with kitchen shears.
Negative oil prices… Really?
We have another addition to the long list of things we never thought we would see.
On Monday, oil did something that made even market veterans shake their heads. The price of U.S. crude oil to be delivered in May, which was selling for roughly $15 a barrel Monday morning, fell to -$40 per barrel throughout the course of the day. As one oil market veteran put it, “I’m not sure how to react to that other than say that nobody, whether they’re 120 years old or whether they’re 20 months old, has ever seen an oil price lower than this.”
So, how exactly are negative oil prices possible and what does it mean? At a very high level, the world is awash in oil. There's very little demand for it and we're running out of places to store it. Monday’s move was largely a supply driven technical event where traders essentially offered to pay someone else to take the oil they were due to have delivered in May. Why would they do that? The primary reason is fear that, if forced to take delivery of crude on the expiration of the May oil contract, they would have nowhere to store it. A glut of crude oil has filled up almost all available storage.
Under normal circumstances, the world produces slightly more oil than is consumed each day, keeping oil prices stable. The global coordinated effort to limit the spread of the coronavirus has put major cities around the world on lockdown, air travel has been reduced to a trickle, and millions of people are working from home, leading to far fewer commuters on the roads. But pumps are still running, extracting oil from the ground, and it all has to go somewhere. This has led to a dramatic supply/demand imbalance where the world is now massively oversupplied with oil, creating a storage issue. Ryan Sitton, the Commissioner of the Texas Railroad Commission, which regulates the state’s oil industry, was recently quoted saying, “It’s the worst oil price in history, which shouldn’t surprise us, because it’s the inevitable result of the biggest supply and demand disparity in history.”
So, what does all of this mean going forward? Supply and demand issues have a way of fixing themselves over time. Producers will dramatically reduce oil production to bring it back in to line with demand, but that will take time. In the meantime, oversupply will continue to be a problem, and we may see additional price volatility in the months to come. As of this writing, oil prices are attempting to stabilize somewhere between $15 and $18 per barrel. Though significantly higher than Monday’s prices, this still represents a pricing range that is devastating for the U.S. oil industry, which just recently reached a level of global independence never seen before. The oil rout will have serious consequences for the oil industry, likely to include bankruptcies, layoffs, and consolidation. Consumers will certainly benefit in the near term, however, with cheaper gas prices - that is, if we have anywhere to go. There may also be secondary effects of the collapse in energy prices, such as the potential for sovereign debt issues across major oil producing nations like Mexico, Venezuela, and Russia. We may also see dramatic moves in currency markets. In normal times, an oil crash would be enough to drive a stock market correction and slow economic growth, but in our current reality, it is getting much less attention. Nonetheless, we are watching it, albeit through our longer untrimmed bangs.
Weekly Market Update
Stock markets, outside of energy, have calmed slightly. We are seeing less dramatic daily moves and markets are roughly flat for the week. Having brushed off negative oil prices, a steady stream of bad economic news, and terrible corporate earnings, the market appears to be more focused on the general sense of optimism that is building around re-opening the economy. While nobody really knows what this will look like, or what level of economic vitality can be regained, the market has been calmed by the massive government monetary and fiscal relief and hope that we are making progress in the fight against this pandemic.
Enjoy your weekend, and please be careful with those kitchen shears.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.