27th April 2020
Trial and error
After making a cameo appearance in the build-up to March’s COVID-19 market crash, last week saw oil
return in dramatic fashion to reclaim the spotlight. This time the performance veered almost into parody,
with the oil price falling into the negative in US markets, thereby displaying price dynamics previously
thought impossible. However, just like other ‘unprecedented’ macro-economic data points that we
predicted would start to filter through, the story behind the headlines only relates to very near-term
misbalances between excess oil supply and much-reduced current fuel demand – negative prices occurring
due to the nature of fixed time delivery contracts versus very limited US storage capacity. Stock markets
reacted to this oil news story with far less lasting excitement than in March and, after a day of downdraft,
instead continued on their path of upward consolidation. We have dedicated a separate article this week
to the oil price dynamic, because within the forward contract nature of oil we have noted an underlying
market predicter for the return of economic normality over the coming weeks that appears to be worth
What the negative oil price tells us – beyond US storage incapacity
As widely reported on the news, this week the impossible happened. The price of American oil sank so
low that it went below $0 – and then some. On Monday, WTI – the benchmark for a barrel of US oil –
saw its May contract end trading at -$37.6. Stories like this call for something a little stronger than the wellworn “unprecedented” label. Never before have oil traders been willing to pay to have delivery contracts
taken off their hands. For many, how this could occur is somewhat confusing. For others, it is a glaring sign
of how much trouble the global economy is in.
Good Bank, Bad Bank
We are used to banks being front and centre during times of economic and financial crisis.
But this time around, banks are not being cast as the main bad guys in the media narrative. We regularly
see stories of businesses big and small struggling to cope with the lockdown, but there has not yet been
any Lehman Brothers moment and hardly anyone is expecting one soon (touch wood). Why not?
Well, for starters, the cause of the crisis had nothing to do with the banks. The pandemic is an external
shock entirely unrelated to any systemic financial risks. More importantly, the financial system itself is far
better equipped to deal with external shocks than back in 2008. That was, after all, the whole point of the
post-financial crisis reforms. Institutions were shown to be ill prepared for a downturn, having become
undercapitalised and (in many cases) grossly negligent of their own duties in the early 2000s. They were
told in no uncertain terms by politicians, regulators and the general public that they needed to do better.