Weekly Market Insight

Daily Global Market Update 21st April 2020

22nd April 2020

Tuesday’s Update: First time in history, price of oil sank into negative territory | US FED is purchasing approximately $41 billion of assets daily

For the first time in history the price of oil sank into negative territory. US treasuries rose on the back of this. Almost one fifth of S&P500 companies will be releasing earnings this week, which could see a ramping up of the pace of disappointing economic data.

The price of West Texas Intermediate, the US benchmark for oil, sank as low as minus $40.32 on Monday’s trading session. With little to no storage capacity available, oil producers began paying buyers to take the oil off their hands as they had nowhere to store it. This comes as a blow to President Trump who in recent weeks has been pushing to raise the price of oil. Since the price drop, he has reiterated plans for the US government to either buy oil or store it, depending on which could pass Congress. It is worth noting that several weeks ago, the purchase of oil was rejected at Congress.

The drop in the price of oil could signify something bigger about the economy. The lack of storage capacity is a deeper insight into the scale of the expected drop in economic activity. The inventories of oil producers has reached capacity as companies are no longer demanding the levels they used to with the significant drop in activity and with consumers not travelling to and from work as much. The price of oil falling benefits consumers. For Irish consumers, Brent Crude is the reference for oil prices and its price dropped from $28.08 to $25.57 yesterday, however there is usually a lag in the time prices fall in the oil market and when it shows at petrol stations. Tax also plays a major role in why the price of fuel for Irish consumers remains expensive in comparison to the price of oil falling so low, as tax makes up the majority of the price.

According to Bloomberg, the US FED is purchasing approximately $41 billion of assets daily to support the economy. Although this is supporting the market in the short term, the question remains what this will look like in the longer term. How big can the balance sheet of the FED get and will they eventually be able to sell this back to market considering the huge size of this asset purchasing programme? If we look at the Financial Crisis of 2008, the FED began purchases but not at the scale we are seeing today. It also took the FED nine years (until 2017), to unwind its balance sheet after the crisis. Although FED assistance is evidently required at the moment to help stabilise the US economy, with the purchasing programme currently being multiples of 2008’s programme, the question remains as to how big the balance sheet can get and how long will it take to unwind it.