Markets: US oil prices go below zero for the first time in history
Australian stocks have followed Wall Street in dropping after US oil prices collapsed and went into the negative for the first time in history.
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The Australian dollar has lost ground after dire local jobs data underlined the economic toll of fighting the coronavirus, while a flare-up in concerns about North Korea hurt risk sentiment across Asia.
The Aussie slipped 0.6 per cent to 62.95 US cents and away from a high of 63.98 US cents on Monday.
It now has support at 62.64 US cents, with sellers likely to move in when the currency gets up to last week’s peak at 64.45 US cents.
Part of the pullback came when markets were spooked by reports North Korean leader Kim Jong Un was ill after undergoing a cardiovascular procedure early this month.
South Korea’s Yonhap news agency later cited a government official saying Kim was not seriously ill.
The risk of political instability in the rogue nation sent the South Korean won sliding and lifted the US dollar, while unsettling stocks across the region.
In Australia, the damage done by the coronavirus lockdown was all too clear as the Bureau of Statistics reported that 6 per cent of all jobs in the country were lost in a brief period between March 14 and April 4.
That would equate to a huge 780,000 jobs out of a workforce of 13 million.
“Rising unemployment will hit consumer spending, home prices and wages growth,” said Diana Mousina, a senior economist at AMP Capital.
“Inflation will also be lower than expected. We expect underlying inflation to be around 1 per cent by the end of the year.”
“At least policy makers are willing to do whatever is necessary to keep the economy from spiralling into depression.”
The Reserve Bank of Australia (RBA) has already cut rates to 0.25 per cent and targeted a similar level for three-year bond yields by buying government debt in the market.
Minutes of the bank’s April meeting on Tuesday showed it feared economic output would shrink markedly this quarter and remain subdued through the third quarter as well.
RBA Governor Philip Lowe is due to speak on the economic outlook and answer questions later on Tuesday.
The bond market is keen to hear more detail on the bank’s bond buying intentions given it has scaled back purchases sharply in the last couple of weeks, even as the government has massively ramped up its borrowing.
On Tuesday, three-year bond futures were a fraction lower at 99.735, implying an yield of 0.265 per cent, while the 10-year contract eased 1.5 ticks to 99.1550.
OIL PRICES HIT HISTORIC LOW
US oil prices crashed to unprecedented lows Monday as futures in New York ended in negative territory for the first time amid a devastating supply glut that has forced traders to pay others to take the crude off their hands.
With space to store oil scarce, US benchmark West Texas Intermediate for May delivery closed at -$37.63 a barrel.
The futures contract for May closes Tuesday, meaning traders who buy and sell the commodity for profit needed to find someone to take physical possession of the oil. But with the glut in markets and storage facilities full, buyers were scarce.
“It’s a contract for something that nobody wants to buy,” said Matt Smith of ClipperData.
Cratering oil prices prompted more selling on Wall Street, which was slowly creeping back up after the coronavirus pandemic battered the major indices.
US stocks opened lower and stayed that way all day, with the Dow petering out to post a 2.4 per cent decline.
The chaos in the oil market comes as the petroleum industry emerges as one of the corners of the global economy made most vulnerable by government shutdowns to limit the spread of coronavirus.
The commodity has been further weakened by a battle for market share that raged much of the spring between Saudi Arabia and Russia.
A deal announced last week between OPEC and independent producers to cut output by about 10 million barrels per day starting in May appears not to have been enough to buoy prices, while the closely-monitored storage capacity at Cushing, Oklahoma was almost full as of Monday morning.
“It’s a dump at all cost as no one … wants delivery of oil, with Cushing storage facilities filling by the minute,” AxiCorp’s Stephen Innes said.
“It hasn’t taken long for the market to recognise that the OPEC+ deal will not, in its present form, be enough to balance oil markets.” Still, Smith noted Monday’s negative price only affects oil deliveries due Tuesday.
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US oil futures for delivery in June also fell sharply, dropping 18 per cent, but finished at $20.43 a barrel.
The European benchmark contract, London Brent North Sea oil for June delivery, ended down nine per cent at $25.57 a barrel.
“This moment is of course historical and could not better illustrate the price-utopia that the market has been in since March, when the full scale of the oversupply problem started to become evident,” said Rystad Energy’s Oil Markets Analyst Louise Dickson.
Meanwhile, most European stock markets ended the day higher as governments start to consider how and when to ease the lockdowns that have crippled the global economy.
Italy, Spain, France and Britain reported drops in daily death tolls and slowing infection rates, while Germany began allowing some shops to reopen and Norway restarted nurseries.