Market Update – Coronavirus (April 22nd)
In the past few days, investor and media attention were focused on the oil market, where the price of a barrel of crude oil (West Texas Intermediate – WTI) went negative for the first time ever. Negative prices mean that buyers are willing to pay the person with the oil to not give them the oil – as they already have enough and do not have where to store the additional supply. Given the nearly-complete stop in economic activity, demand for crude oil has plummeted (just think – how much have you driven your car recently?). No buyers – so the price falls. The oil producers are now trying to match the drop of demand with a significant cut in production. However, the production cuts have come a bit late and it is not clear yet whether they are enough to restore the demand-supply balance in the oil market. In any case, even if enough, it will take a while for the excess supply to clear up.
From a macro perspective, the important point about all this is that it highlights the extent to which economic demand has been damaged by the Coronavirus lockdowns. This realization is what sent the S&P 500 equity index down -3.1% last night.