We all know that the global economy is heading for a deep recession, which will probably overshadow past crises. On the financial markets, we can see little of this development so far. Although the stock markets fell by a good 40% in the initial reaction, the unbelievably high government pledges to support companies and private households have contributed to a rapid recovery of the stock markets. Equity market valuations are now almost back at the very high levels seen before the Corona crisis.
In the bond markets, and especially in government bonds, the virtually unlimited commitments of the central banks are having an effect. There is hardly a bond segment that cannot profit from the purchases of the central banks. Here, too, the effects, in the form of higher government debt or increasing balance sheet risks of companies, are to be seen as very subdued, if at all.
However, the economic slowdown is reflected with full force in the price of oil. Here, OPEC is also trying to stabilize prices. However, the decline in demand is so pronounced that these activities can hardly have any effect. The oil price is falling almost like a stone, to levels not seen for decades.
In fact, the last few days have seen a negative oil price of minus USD 40 for the first time since the WTI contracts traded on the New York Futures Exchange (NYMEX) came into existence. However, it is necessary to be a little more precise here, as this is the May contract that matures today. The June contract is significantly higher at plus 20 USD. The „spread“ has never been so high.
The rising forward curve suggests that storage costs in the USA are currently shooting through the ceiling. No wonder, as capacities are almost exhausted. The delivery location for WTI in Cushing (Oklahoma) will no longer be able to hold oil in two weeks. In March alone, the Cushing stocks have increased by almost 50 percent to 55 million barrels. The Americans can only take some pressure off the boiler by massively increasing their strategic reserves. If demand does not recover somewhat, the June contracts will also slide into negative territory.
Less critical of the system, but still dramatic, is the situation for Brent as a global crude oil producer. Today, Brent has fallen by more than 22 percent. The picture that crude oil paints for the global economy looks bleak and gives little reason to expect an improvement in the near future. Worldwide demand fell by a third in March/April due to shutdowns and travel restrictions.
The oil price is one of the few markets that reflects the coming economic development relatively well. Against this background, the recent recovery on the stock markets appears almost euphoric and one can probably expect another correction here. The profit expectations for companies are currently still too optimistic and are likely to be noticeably corrected downwards. In the case of bonds, however, the central banks should prevail in the end, and here the functioning of the markets is probably permanently disturbed.