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Robert Burgess

Take Oil's Plunge Seriously, Not Literally

The precipitous drop in crude prices was partly technical, but it doesn’t bode well. Plus, more market commentary.

Worst behind us? Slumping oil prices suggest it will be a slow road to recovery. 

Worst behind us? Slumping oil prices suggest it will be a slow road to recovery. 

Photographer: David McNew/Getty Images North America

Global market participants were fixed on the oil markets Monday as West Texas Intermediate crude futures crashed to negative — yes, negative — $40.32  a barrel from $18.27 on Friday. What this means is that owners of those futures were willing to pay someone $40.32 a barrel to take those contracts off their hands. Don’t look for historical comparisons, because there are none. And while yes, the move was shocking, it can largely be explained by technical factors, with traders fleeing the May futures contract ahead of its expiration Tuesday so as not to get stuck actually holding physical barrels of oil with no place to store it. The June contract was more in line with reality, trading at around $21.50 a barrel. Still, the episode speaks volumes about the current state of financial markets.

At the least, the craziness in oil — coming just a week after the historic deal between OPEC, its allies and Russia to curb production — underscores how the problems facing the global economy from the coronavirus pandemic won’t soon go away despite the recent rebound in equities that pushed major indexes above their lows of 2019 set last June. After all, it was also just over a week ago that the International Monetary Fund forecast the worst global downturn since the Great Depression. If true, demand for oil isn’t likely to make a comeback anytime soon, especially with lockdowns still in place in much of the world. The strategists at Morgan Stanley in their weekend research note made clear “sustainable re-opening” of economies and business require four key components: 1) adequate surge capacity in hospitals, 2) public health infrastructure to support testing, 3) robust contact tracing to curtail “hot spots,” and 4) widespread access to serology testing to determine who is already immune to the virus. “Even then, however, the return to work will be slow, with our economists not expecting to see pre-recession levels of output for U.S. or global growth” until the fourth quarter of 2021, Morgan Stanley strategist Ed Sheets wrote in the note.