Markets Opening: Indices Futures and Oil Drop March 30th

U.S. equity futures reversed an opening decline to trade higher Monday as investors took in the latest developments on the coronavirus spread. Asian shares pared losses.

In a mixed day for risk assets, the dollar snapped a four-day slide, while the yen advanced along with sovereign bonds. Oil in New York dropped below $20 at one point. Japan’s Topix underperformed as a majority of its members traded without the right to the latest dividend. The yuan slid as China’s central bank lowered short-term funding rates and injected cash into its financial system.

U.S. stock futures erased losses, as traders reacted to China’s rate cut on seven-day reverse repurchase agreements on Monday. As part of the stimulus, the People’s Bank of China injected 50 billion yuan ($7.1 billion) into the banking system.

Contacts on the S&P 500 expiring in June rose 0.1% at 1:41 p.m. in Tokyo on Monday, erasing a drop that exceeded 3% in early trading. China’s central bank cut the interest rate it charges on loans to banks by 20 basis points, the biggest amount since 2015 as authorities ramp up their response to cushion an economic slowdown.

U.S. Futures have “started picking up following China’s extensive cut of 20bps to 7 day repo rate, providing some support for the market,” said Jingyi Pan, market strategist at IG Asia Pte.

Oil – Monday March 30th

US crude oil price falls below $20
Fall in demand due to virus creates surplus that risks overwhelming storage capacity

US crude oil prices fell below $20 a barrel shortly after trading reopened on Sunday, close to their lowest level in 18 years, as traders bet production would have to shut to cope with the collapse in demand from the coronavirus pandemic.

The US benchmark, known as West Texas Intermediate or WTI, hit a low of $19.92 a barrel, losing more than 6 per cent.

Brent, the international benchmark, lost 6 per cent to hit a low of $23.03 a barrel, the lowest since 2002.

Oil prices have fallen by more than half in the past month as widespread lockdowns in Europe and North America have slashed oil demand, with analysts forecasting as much as a quarter of normal global consumption could be lost.

With supply accumulating at the same time because of the price war between Saudi Arabia and Russia, traders believe the surplus could approach 25m barrels a day next month, a level that could overwhelm storage capacity worldwide within weeks.

“This is a historic oil price collapse, and it is not done yet as the system physically runs out of places to put all the oil,” said Jason Bordoff, a former energy adviser to the Obama administration and the founder of the Center on Global Energy Policy at Columbia University. “The pain in the shale patch is going to be severe. We will see production shut-ins accelerate.”

Prices are expected to remain under pressure until the market adjusts and producers will probably be forced to close down output at a scale never seen in the modern oil industry.

WTI briefly traded below $20 a barrel this month as the April contract expired, dropping violently in thin trading. But this is the first time WTI has traded sub-$20 a barrel since 2002 in normal trading conditions.

Higher cost producers such as US shale and Canadian tar sands are broadly unprofitable at these price levels, though companies will hope other producers shut off production first, creating a war of attrition in the industry.

But the sheer speed and depth of the price fall, which has taken crude below the levels to which it plunged both in the last crash in 2014-16 and during the financial crisis, will probably force a quick reckoning in the industry. US energy producers already made the biggest cut to the number of drilling rigs operating in five years last week, according to data from Baker Hughes.

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