Oil View: June contract more reflective of real market dynamics – WTI oil prices dropped to the lowest level since early 1999 yesterday. Just before the expiration of the May contract, prices dropped by 40% to below USD 11/bbl. High inventories in combination with the oil demand shock caused by the coronavirus measures have triggered a steep contango for oil prices. Although many investors and market participants already shifted their outstanding positions from the May contract to the June contract in the days before, the final trading before physical delivery triggered high pressure on this contract. The Brent and WTI June contracts also declined, albeit to a much smaller degree, and the Brent/WTI spread on this contract remained roughly USD 4/bbl.
The fact that WTI is trading below the Brent price is a consequence of the OPEC+-production cut agreement. Brent crude mainly reflects the floor which is the result of the active production cut by OPEC and its partners, led by Russia. In the US, production is also expected to decline, but this will be the result of market dynamics. In other words, oil prices need to trade lower for longer to trigger these production declines. The first signs of this are already appaent, with the number of active drilling rigs falling (from 683 to 438), and US crude production down from 13 mb/d to 12.3 mb/d in just a few weeks time. Looking ahead, our macro economists expect a recovery in the second half of the year, which we expect to drive a recovery in oil prices. However, we still think the upside potential will be capped due to high inventories and the delayed effects on US shale production. This also reflects a wider Brent/WTI-spread. For more on our oil market view, see our latest Energy Monitor. (Hans van Cleef)
ECB View: Pace of PEPP steady, APP sees sharp drop in net purchases – The weekly figures of the Eurosystem’s net asset purchases within the PEPP as well as the APP (including the EUR 120bn extra envelop) showed that the central bank bought EUR 21bn of securities last week. This was sharply down from EUR 37bn and EUR 34bn during the previous two weeks, respectively. The slowdown was largely due to the APP (EUR 547mn versus EUR 16bn), as the pace of purchases under the PEPP were EUR 20bn last week, which was in line with those during the week before last. A breakdown of the APP purchases showed that covered bonds (EUR 1.5bn) and corporate bonds (EUR 1.4bn) were the main drivers of net purchases, with outstanding balances of the PSPP as well as the ABSPP actually declining. This reflects that the central bank was unable to reinvest maturing principals fully last week for these programmes, also suggesting that it had to reinvest large amounts. As such, the drop in net APP purchases could well be compensated for by last week’s reinvestments (proof of this will be in the weekly financial statement published tomorrow). Overall though, the big picture remains that ‘fragmentation’ (or rising country spreads) have continued to increase, despite the fact that the Eurosystem has significantly stepped up its presence in the market. Therefore, we expect the ECB to increase the size of the PEPP by EUR 500bn later this month, which would also be in line with recent hints from ECB Executive Board members (see here). (Joost Beaumont)