WTI oil price trades below zero on oil glut and technical factors. But little ripple effect elsewhere – S&P500 -1.5% but bonds little changed. NZ plans to come off Covid Level 4 next Tuesday

There has been an almost unbelievable fall in the US West Texas oil price overnight, with the soon-to-mature futures contract trading to as low as -$40 per barrel (minus forty dollars).  A glut of oil, lack of physical storage capacity and technical factors related to the May futures contract expiry are all at play.  Broader markets haven’t been overly affected by the fall in oil prices – US equities have fallen 1-2%, bond yields are little changed and the CAD and NOK have fallen, but only by about 1%.  In NZ, the PM said the Covid Level 4 lockdown should end next Tuesday, which has boosted the NZD.  The NZD has been the best performing currency in the G10 over the past 24 hours.  

Market focus overnight has centred on the oil market.  US West Texas Intermediate (WTI) has fallen traded below $0, with the front May futures contract trading to as low as -$40 per barrel.  This means sellers were willing to pay buyers to take oil off their hands.  It started the week at around $20 per barrel.  How to rationalise a negative oil price?  For sellers of oil, its expensive to shut down wells, oil pipelines and storage facilities are filling up towards capacity, and there are costs and practical difficulties with transporting oil from inland hubs to ships on the coast which offer floating storage.  Tonight’s expiry of the May futures contract is believed to have heavily contributed to the fall in prices.  WTI futures are deliverable, meaning that those who own the contract need to have a place to store the oil.  Those participants betting on higher prices via the May contract have rushed to close out positions before expiry, so as not to be delivered physical oil. 

WTI futures prices for later months are much higher than those for the May contract.  For instance, the June contract is priced at $21 per barrel (-16% on the day).  This reinforces the view that the unbelievable fall in prices seen overnight is more related to technical factors around this futures expiry and short-term capacity issues, which the market expects to normalise in the coming months.  Futures contracts on the other key oil benchmark, Brent crude, have fallen by less (June contract -7% at $26 per barrel).  The Brent Crude May contract has already settled. 

There has been surprisingly little contagion, at this stage, from the dramatic fall in oil prices to other asset markets.  US equity markets have held in relatively well, although they started selling off over the past hour as May WTI futures started trading negative.  The S&P500 is 1.6% lower on the day while tech stocks have outperformed (NASDAQ -0.8%).  Credit spreads have widened (high yield CDS index +50bps to 640bps) but the moves are much more modest than those seen in March and early April. 

Similarly, US Treasury bond yields have barely moved despite the carnage in the oil market.  The 10-year Treasury yield is 2bp lower, at 0.62% currently.  Market-implied US inflation expectations have fallen, with the 10-year ‘breakeven inflation’ rate down 6bps, to 0.96%. 

In FX markets, the oil-sensitive CAD and Norwegian krone (NOK) have underperformed, down 0.8% and 1% respectively.  These moves are modest compared to those seen in March (on one day in March the NOK fell almost 8%).  Moves in other currencies have been smaller.  The USD is stronger against all currencies bar the NZD, with the BBDXY up 0.4%. 

Yesterday, the PM Ardern announced that NZ will reduce its Covid-19 containment status from Level 4 to Level 3 in light of the fact that there appears to be no (or very low) community transmission here. However, the alert level will not change until April 29 leaving New Zealand in lockdown for another week yet. Our back of the envelope calculations indicate that around 500,000 people, will, at least theoretically, be able to go back to work under Level 3, including those in construction, manufacturing, forestry and distribution.  It appears there will be two weeks in Level 3 before consideration is given to moving to Level 2. Level 2 would mean a more substantial opening up of the economy. 

The NZD has outperformed over the past 24 hours (+0.2% to 0.6045), seemingly boosted by the government’s announcement that the Covid Level 4 lockdown would eased in a week’s time. 

In terms of Covid-19, there has been more encouraging data on infection rates in Europe and the US.   Italy reported its fewest new cases since March 10th, while the UK reported its lowest daily death toll since April 6.  New York recorded its sixth day in a row of declining deaths.  The flattening trajectory in the spread of the virus has given market participants hope that economies can start to be gradually ‘unlocked’.  Overnight, Germany allowed small shops to open and said schools should reopen in early May.  The race to find an effective treatment for Covid-19 continues apace too.  Swiss pharmaceutical firm Novartis said it would run trials on malaria drug hydroxychloroquine, which Trump has been championing as a possible treatment. 

US lawmakers look set to sign-off another fiscal stimulus package over the coming days.  Treasury Secretary Mnuchin and the Democrat Nancy Peloci signalled over the weekend that they were close to agreeing a deal worth close to $500b.  Congress has been told to prepare for a possible vote on Wednesday.  The stimulus will top-up the Paycheck Protection Program (PPP), which provides assistance to small businesses, with another $300b or so.   Additionally, there will reportedly be a further $50-$60b for small businesses, $75b for hospitals and $25b for Covid-19 testing.

In Australia, local media have reported that Virgin Australia is about to go into voluntary administration, having failed to secure bail-out funding. If so, would be the first major COVID-19 related corporate failure in Australia. It employs about 10,000 people directly. 

In the domestic rates market, swap rates moved lower and flatter yesterday.  The 2-year swap rate reached a new low of 0.33% (-1bps) while the 10-year swap rate moved to within touching distance of its all-time low, closing at 0.87% (-5bps).  There was no reaction whatsoever to a much higher-than-expected NZ CPI release yesterday.  Headline CPI increased to 2.5% in Q1 from a year ago, its highest level in a decade (excluding the GST-induced spike in 2010/11).  Of course, the data is now completely out of date and the market is much more focused on the near-term deflationary impulse coming from wages cuts, falling oil prices and the sharp fall in demand stemming from the Covid lockdown.