It's fair to say that oil and financial instruments based on its price are currently the most volatile. This means that in one day prices could move by several dozen percents one way or the other, as we observed during the session on Tuesday, April 21.
The prices were initially above USD 20 before falling to USD 10 per barrel, followed by a rebound to USD 15. In percentage terms, these are huge price jumps, which seems to push the oil market to the lead in terms of the greatest volatility. We are witnessing an emerging history and observing unprecedented events because, due to the global lockdown, global oil supply may overwhelm demand in the coming months, and current production cuts are not able to balance the market. In 2020, oil prices are falling by around 80% as the pandemic spreads worldwide, leading to the worst economic downturn since the 1930s crisis.
In this situation, the only reasonable solution, due to the shrinking space for storing the extracted oil, would be to freeze oil production worldwide until the economies return to normal functioning. US oil inventories increased last week by 13.2 million barrels, to 500 million barrels, according to data from the American Petroleum Institute. Today we will get official government figures. The huge volatility in the oil market prompted CME Group, the world's largest commodity exchange, to increase margins on futures.
Falling prices are a great shock for the entire oil sector and the financial sector, which paid off oil projects. Not only mining companies or refineries are at risk of collapse, but also banks or funds that bought bonds from oil companies or granted them loans or credits may be at great losses. There are many indications that in addition to the pandemic and the forthcoming drought in the northern hemisphere, other problems may be added – the bankruptcies of oil companies.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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