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Stocks climb, oil sinks: Why plunging crude prices are spooking traders again

April 28, 2020, 9:14 AM UTC

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Good morning, Bull Sheeters. Stocks are trading higher, which is pretty impressive considering the volatility in the oil markets and a fresh wave of weak corporate results.

Let’s check in on what’s happening around the world.

Markets update

Asia

  • The major indices are mixed, with Hong Kong up and Tokyo and Shanghai down.
  • In Asia trade, the price of Brent and WTI plunged again, extending yesterday’s losses.
  • South Korea, one of the world’s biggest storage markets for crude, is telling producers we can’t take on any more barrels. The state-run Korea National Oil Corp. said it’s run out of the storage space it usually leases to third parties.

Europe

  • European bourses are all trading in the green after a sluggish start. Germany’s DAX led the way higher, up nearly 0.7% in mid-morning trade.
  • To earnings now… Oil giant BP announced a big profit hit. HSBC and Spain’s Santander, meanwhile, warned that non-performing loans and bad credit were quickly marring their books. Novartis though bucked the trend. The drugmaker kept intact its full-year revenues and profit forecast. Don’t hold your breath waiting for a COVID-19 vaccine, CEO Vas Narasimhan told Bloomberg TV in an interview.
  • We get euro area Q1 GDP numbers on Thursday, and it’s looking bad. The first quarter is shaping up to be the first contraction since 2013. The current quarter looks even worse.
  • Now for some good news: Italy and Germany reported yesterday multi-week lows in the number of new coronavirus infections.

U.S.

  • The Dow, S&P 500 and Nasdaq futures all look to open higher, extending yesterday’s gains. All three began the week in strong fashion, notching gains of between 1.1%-1.5% yesterday.
  • Round 2 of the Paycheck Protection Program (PPP) got underway yesterday. Demand for the small-business loans is brisk, and the online portal is having difficulty holding up.
  • Reminder: it’s a big week for company earnings. All eyes will be on Alphabet today, which reports after the close today.

Elsewhere

  • Gold and the dollar are down as U.S. equities futures climb.
  • Crude is tanking again today. WTI futures fell below $10.50/barrel at one point on Tuesday. The U.S. benchmark is down more than 30% over the past two trading sessions. The contagion is rocking Brent too. The global benchmark is down more than 5% to below $20 per barrel.

The week ahead

Could crude go subzero again? That’s becoming a distinct possibility as WTI falls by more than 15% for a second straight day. The lockdowns have decimated demand. Storage is scarce. Throw in a major oil ETF dumping futures contracts, and you have all the makings of another market collapse. It seems nobody wants to get caught holding contracts for WTI specifying delivery over the next two to three months. June and July futures contracts were both under 20 bucks, and falling this morning.

This is a global issue. IEA forecasts that oil demand will fall by a record 12 million barrels per day in May, and that’s creating a wide gulf in the industry: those who have storage and those who don’t. “We’re fortunate in that we can find a physical home for crude,” Bernard Looney, BP CEO, told Bloomberg TV this morning. “Not everyone is so fortunate.”

Among the most precarious are U.S. oil producers. Storage space is quickly nearing capacity, whether it be at the main hub in Cushing, Okla., or at other commercial locations. In fact, unless demand rapidly comes back online, capacity for U.S. crude storage could max out by as early as September, as today’s chart shows.

This chart and data comes courtesy of CFRA, an independent investor research firm, that sent me their oil report yesterday. They project that Cushing will run out of storage space by the end of May, a development that could spook the markets further as it has the capacity to hold a whopping 76 million barrels. Once Cushing is no longer available, we’re looking at no more than three to four more months before commercial U.S. storage (should current output and demand rates persist) reaches its limits. Yes, the U.S. government could step in and buy crude to fill the strategic petroleum reserve, but that too is close to the brim—already 89% full, CFRA says.

“The situation is like a very elaborate game of hide-and-seek…except everyone is trying to hide, not seek,” the CFRA report authors says.

BP’s Looney didn’t seem all that perturbed by the situation this morning on TV. He said the company is still doubling down on its commitment to transition to more renewables. “The pandemic only adds to the challenge for oil,” he said, before noting that people are seeing more clearly a new future, one with, “blues skies and clean air.”

It looks true from where I sit. It’s remarkable how clear the skies have been above Rome lately.

***

Have a nice day, everyone. I’ll see you here tomorrow.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

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Today's reads

Just what 2020 needed: pirates. There’s been a big spike in piracy in Q1 because, you know, pandemics aren’t frightening enough. That’s according to International Maritime Bureau, which says the first three months of 2020 saw 47 pirate attacks compared to 38 in Q1 2019. Most of the activity can be found in the Gulf of Guinea in West Africa, busy waters for oil-exporting countries. Never mind that global oil prices are tanking, and that global trade has ground to a halt. Piracy is expected to soar this year and next, CNBC reports.

Dunking on Uncle Sam. Playing “small ball” might be en vogue in the NBA, but the Los Angeles Lakers may have taken things too far, writes Fortune’s Rey Mashayekhi. The Lakers, one of the richest franchises in professional sports, had scored one of those elusive PPP loans meant for small businesses. Alas, it announced Monday it’s returned the money, all $4.6 million of it.

Square pegged. Digital payment company Square is one of those bellwether stocks that reveals a whole lot about the health of America’s Main Street. And things aren’t looking too good. When Square reports its quarterly results next week it’s expected to detail to investors a big drop in revenues, of about 61%. “It can withstand a downturn,” BTIG analyst Mark Palmer tells Fortune. “With that said, we are anticipating that the company is going to see a very steep drop.”

Market candy

340 billion

In 2009, at the depths of the global financial crisis, the sheer amount of U.S. corporate junk—defined as “selective default” grade, a key measure of corporate credit worthiness— hit record levels of nearly $340 billion. We may exceed that dubious level in the coming months, analysts say. “Even in a less grim scenario, the figure could approach levels reached after the dot-com bust in the early 2000s,” The Wall Street Journal reports.

One more thing. We've got another webinar/q&a this week: Fortune executive editor Adam Lashinsky will chat tomorrow with tech analyst Gene Munster of Loup Ventures about how he sees the investing environment playing out in these crazy times.

Date and time: Wednesday, April 29, at 10:00 Pacific/1:00 Eastern. 30 minutes duration.
registration link: https://us02web.zoom.us/webinar/register/WN_09HTHFKxT-yqQPjrjkGvAg