sport football: Oil’s Crash Should Give You Pause About a Quick Market Recovery

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Tuesday, April 21, 2020

Oil's Crash Should Give You Pause About a Quick Market Recovery
By D.R. Barton, Jr.

On Monday of last week, I told you about the Reality Gap in oil - that the new "deal" involving Saudi Arabia, Russia, and the U.S. to cut production was missing the real issue of the Saudi price cuts to Asia and weakened demand. And today, we are seeing a continuing stock market Reality Gap come through the message of oil pricing - here's how...

After two the two best weeks for markets since 1938, it was about time for some profit-taking. This morning, markets opened down about a percent, despite the news over the weekend being pretty good.

A few states, including Texas, have decided to start loosening their social distancing restrictions somewhat. In Europe, Germany, Poland, Norway, and the Czech Republic have begun easing their lockdowns. And in Asia, South Korea's numbers show the country continues to have its outbreak under control.

However, the fly in the ointment is oil. As oil futures started trading on Sunday night, the price of U.S. oil dropped by more than 30%, to lows not seen since 1999. This sent stock market futures down as well. Oil powers so much of our economy that crude prices are a good measure of economic activity. And so demand for oil is a direct reflection of global economic health.

And as I mentioned above, prices are down this far despite the deal between oil-producing countries to reduce global crude production by about 10 million barrels per day.

The problem here is simple: the deal was always too little, too late. The 10 million barrels a day cut still leaves about 20 million barrels a day of oversupply, and storage is quickly running out. With no one to use it and nowhere to put it, oil producers are being forced to sell crude at historically low prices.

Not to mention that there are serious concerns about whether OPEC will even stick to its promised production cuts.

So as oil prices crashed, traders and analysts got another sign that there was a huge Reality Gap between their bullish trading for the past two weeks - and the economic reality of plunging global demand.

The market optimism is understandable. As New York's COVID-19 infection rate and new deaths from the virus keep dropping, and countries overseas start to slowly wind down their lockdowns, traders start feeling optimistic. No one wants to miss out on the recovery rally fueled by the unprecedented trillions in stimulus.

But this risks putting the cart before the horse, as we saw this weekend. Because even as the virus-related news gets better, we're starting to get more information about how badly damaged the economy is.

Earnings seasons is starting in earnest, with some giants like IBM and Coca-Cola reporting this week. Last week's bank reports were worse than expected. And remember, this earnings season covers January through March, and the pandemic only really hit the economy in March.

How traders and analysts interpret the numbers this week will be key. Another string of bad but not horrible news might be enough to keep markets going up a bit longer.

But as we get more and more data on how the economy is actually doing, this gap will narrow. And we'll see what kind of recovery we'll be looking at down the road.

Right now, the prognoses are all over the board: from a deep, multi-year recession (and even some thoughts of depression thrown into the mix) to a V-shaped recovery bringing us to all-time highs in months, to everything in between.

So far, there's not enough data to tell. But the market's optimism that we're already in a V-shaped upswing is premature - and oil prices are screaming that to us loudly and clearly.

Great trading and God bless you,

D.R. Barton, Jr.

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Oil’s Crash Should Give You Pause About a Quick Market Recovery

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