22 April - update from our investment partners

  • 22nd April 2020
  • Investment partners update

The latest investment bulletin from one of our investment partners

What has happened

It was another risk off day for markets driven by three factors: further weakness in the oil price, concern about the EU Council meeting on Thursday and weaker US corporate earnings. Equities sold off across the board however the weakness was particularly pronounced in European banks which are now almost 50% lower since the start of the year. The main focus of the market remains the oil price however and any hope that Monday had seen the last of the technical squeeze was short-lived.

What is next for the oil price

Monday’s volatility centred around the May WTI futures contract which expired yesterday but focus has quickly turned to what that means for other contracts. The WTI contract that sees oil physically delivered to Cushing, Oklahoma in June expires on 19th May and unless there is a change in the supply and demand dynamics it is likely this will be a crunch point too. Whilst talk is still focused on the reopening of economies it is unlikely that demand for oil will increase dramatically in the next month given the gradual easing of lockdown that will occur. Equally OPEC ministers had a call last night and there were no further measures announced to suggest either further cuts or a more rapid timetable for those cuts already agreed. Brent Crude also came under pressure yesterday as the seaborne market started reacting to the increasing cost of renting oil tankers. Whilst the Brent Crude market should be able to adapt more flexibly to the storage issues we have seen in Cushing there remains a risk to this market too and this has weighed on sentiment further.

What does Brooks Macdonald think

Whilst the volatility we have seen over the last few days can be largely attributed to technical factors rather than fundamentals there is no doubt that the COVID-19 crash in demand is the primary catalyst. As equities have begun to return to a more normal range over the last three weeks this has proved an unwelcome reminder of the market stress at the end of March. Indeed, yesterday’s announcement that the US had passed $484bn in new pandemic relief funds did little to buoy sentiment as market pricing tries to adjust to the new level of volatility. One point to note however is that the market is still expecting oil pricing to return to more normal levels over the medium term but you can expect more dramatic headlines in the interim.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.