Dubai: UAE stock markets remained under strain on Tuesday after steep overnight losses in US crude spooked investors. Analysts are pointing to more such declines in days to come.
Dubai Financial Market (DFM) dropped 3.28 per cent to 1,825 points, while Abu Dhabi Securities Exchange (ADX) was 2.7 per cent down to 3,860 points.
Oil markets barreled into complete dysfunction with the US crude benchmark (WTI) dropping to a whopping negative $37-a-barrel on Monday. However, WTI did claw back a lot of the overnight losses Tuesday morning with trades currently hovering at zero per barrel.
As the oil market remains at strained conditions and spot prices stay at negligible levels, the risk of a return to negative prices remains high
“As the oil market remains at strained conditions and spot prices stay at negligible levels, the risk of a return to negative prices remains high,” warned Aditya Pugalia, director of financial markets research at Emirates NBD. “The disorder doesn’t show signs of ending.”
Key indices in rest of the oil-reliant GCC were in decline, with Saudi Arabia’s Tadawul, benchmarks in Kuwait, Bahrain, Qatar and Oman all down over 1 per cent.
‘Poisonous cocktail’
Prices fell victim to a “poisonous cocktail” of demand destruction, no storage capacity and an expiring futures contract for May WTI, explained Pugalia, while adding that although prices are currently staging a so-called recovery, it remains “completely disconnected” from market fundamentals.
Although the slump in US crude prices was short-lived, it further fueled the existing panic brought on by a fast spreading pandemic and resulting lockdowns. Not to mention, such negative pricing has never happened before on an oil futures contract.
“Negative prices may seem an impossibility — the notion implies that oil producers would need to pay for someone to take their crude — but so did negative interest rates ahead of the Global Financial Crisis,” Pugalia added.
"This just goes on to indicate how worrisome the situation in the market has become with supply outstretching demand by a huge amount," said Vijay Valecha, chief investment officer at Century Financial. "The harsh reality that June contract may suffer a similar fate towards expiry is slowly and steadily hitting the markets."
West Texas oil to stay in focus
West Texas oil will remain in focus for now, with all eyes on the difference in value of the contracts over the next few months. The current ‘spread’ (gap between bid and ask price) reflects the growing fear that those who take physical delivery of crude in the near future may not find any outlet or storage for those barrels.
“As shocking as WTI’s descent into negative territory is, the enormity of the 1-2 month spread is also difficult to fathom,” notes Pugalia. “For the active June/July spread the market is in a contango of more than $20/b, its widest level on record by a considerable margin.”
A contango market implies oil traders believe crude prices will rally in the future, encouraging them to store oil now and to sell at a later date.
There could be many bankruptcies in the oil industry and only the strong are expected to survive
The international benchmark, Brent crude, which has already rolled to the June contract, is currently 10.1 per cent lower at $22.98 per barrel.
Global markets
Stocks in Europe and Asia retreated while US equity-index futures edged lower on Tuesday. The Stoxx Europe 600 index fell for the first time in four days, with energy companies leading the decline.
"There could be many bankruptcies in the oil industry and only the strong are expected to survive," Valecha added. "Major US banks have limited exposure to oil companies and they are expected to be relatively immune to this crisis."
Adding to immediate concerns of West Texas crude, was reports about the health of North Korea’s dictator. Contracts on the S&P 500 surrendered early gains after reports that North Korea’s Kim Jong Un was in critical condition.
Benchmarks in Seoul, Tokyo, Hong Kong and Shanghai were down more than 1 per cent, while shares in Australia slumped more than 2 per cent as the central bank warned of an economic contraction.
As a result of investors fleeing risky assets, safe-haven assets such as gold and the dollar climbed.
