Volatility in Oil Markets
One pocket of the capital markets that has seen elevated levels of volatility is the commodities sector, particularly crude oil products. On the supply side, recent negotiation fallouts have led to a price war being waged between Saudi Arabia and Russia. At a time where output cuts were trying to be reached by OPEC+, two of the largest oil producers on the planet have maxed out their production capacity flooding the market.
The demand side of the shock comes from the halt in economic activity brought on by the virus outbreak and government shutdown. Without people flying, driving, or transporting goods, demand for crude oil and refined products have dropped off the map.
Investors were greeted by headlines this morning of US light crude oil prices hitting 21-year lows at an astonishing $13.99 per barrel. But those watching this front month expiry benchmark should be aware that this price can be partially misleading. Part of the reason for the rout of these crude prices is because of the mechanics behind how the futures contracts work. The value date of these contracts is today for expiry on Tuesday and delivery taking place in May. Many owners do not have the storage capacity to take delivery of this product because of rising inventories based on low demand. These parties are then being forced to sell to those that do have capacity at a significant discount. The price of June contracts is therefore a better benchmark although these contracts are also suffering from an imbalance of supply and demand in the markets and we suspect that this volatility will continue for the rest of the year.
Excerpt from Covington Investment Advisors, Inc. Q2 2020 Market Outlook
Above is some of our commentary on the energy sector and what key events are affecting this segment. The energy sector always has been and most likely always will be cyclical. Although this sector now only makes up less than 3% of the S&P 500, it has reverberations throughout the whole economy especially in energy centric hubs such as Texas. We continue to monitor these developments and will keep you informed as new events take place.
Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.
Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.