Oil Implodes, Crisis Looms
The collapse of OPEC+ on Friday prompted Saudi Arabia to launch a price war and crude prices fell more than 20%. The yen soared in early trading gas oil-related currencies sank. USDJPY fell 2.7% on the day, the worst daily drop since Aug 2016. CFTC positioning data emphasized the squeeze on euro shorts. The yield on the US 10-year treausry is down 49% (no typo) so far this month, the worst monthly drop ever. For a perspetive, the worst monthly decline on yields was 25% in Nov 2008. Yields on the UK 2 and 5 yr bonds have entered negative territory. Tuesday's Premium short in the Dow Premium hit the final target for 1590 pts. 2 new trades will be issued later this evening, adding to the existing two open trades.
Oil fell 10% on Friday and upwards to 20% on Monday in a proper crash. OPEC+ was unable to come to a consensus on cutting production Friday and all parties walked away. OPEC officials tried to put a positive spin on it but behind the scenes Saudi Arabia was launching a price war. On the weekend they contacted customers to offer them $8-$10 discounts and reports say they're prepared to start pumping an additional 2 million barrels per day in April. At the open, WTI crude fell $11 to a low of $30.00; Brent fell $11 to $31.02 before a $4 bounce.
As we've highlighted repeatedly in the past month, there is nowhere for the extra oil to go. Coronavirus has already destroyed at least 3 million barrels per day in demand and global storage levels are already high.
Oil companies are going to have a disaster of a day on Monday and virtually all producers are on a slow march to bankruptcy in the low $30s. US shale was already struggling and is particularly vulnerable now with more than $200B in bank debt due through 2023 and perhaps as much in bank debt.
So while oil will grab the headlines on Monday, the spots to watch for stress are in the high-yield market and related industries. In the FX market, oil exporters are in trouble. USD/CAD rose to 1.36 in early trade and NOK hit the lowest against the US dollar since at least 1985.
At the same time, coronavirus continues to escalate. Italy locked down the Lombardi region and its 16 million people while Saudi Arabia also announced a limited quarantine. Case and death numbers are rising everywhere outside of China with no end in sight. The only safe havens at the moment are gold, JPY, CHF and bonds.
The market is on the verge of panic.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -87K vs -114K prior GBP +35K vs +30K prior JPY -42K vs -56K prior CHF +3K vs +1K prior CAD +11K vs +15K prior AUD -52K vs -44K prior NZD -17K vs -15K prior
At this point, there is mass de-risking ongoing and that will push many speculators to the sideline. That means an unwind in many of these trades, which is what we're already seeing in the euro.
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