Monday’s epic collapse in WTI (West Texas International) crude oil futures to forty-minus-zero might not be just a “fleeting moment” that the biggest Pakistani English newspaper’s lead editorial made it out to be. The development may have occurred only for contracts for May delivery, that were expiring on Tuesday (one day after the crash), and only happened in the market for one benchmark. Yet it did not take long for the June contract to come under pressure as well as it dropped by more than 45 per cent to close at $11 per barrel on Tuesday. The selloff clearly means that the supply glut is not a couple-of-months thing in the US and the May contract was not a one-time abnormality. In fact, considering how things are going it wouldn’t at all be surprising to see something similar happen in one month’s time because none of the fundamentals are likely to change.
As for just one benchmark, surely they just missed how the WTI collapse rubbed off onto Brent crude as well, which fell more than 25 per cent to under $18 per barrel on Tuesday. Just this January, when Brent was going strong at $74 per barrel and the coronavirus hadn’t come onto the world stage quite like it did subsequently, already seems like a time from another world. And it is simply shocking that in just three months the coronavirus pandemic changed the world so much that WTI crude collapsed below zero. Who would have thought that there would suddenly be more oil than can be stored, with Washington considering slapping tariffs on Saudi and Russian crude imports to protect its own shale oil and gas industry and the millions of jobs it provides?
Perhaps it only adds to the shock that the reasons behind the collapse are pretty straight forward. The world has simply not seen demand destruction on such a large scale before. Strange as it is, there’s just not much use for oil these days. There aren’t many cars on the streets, nor airplanes in the sky, and much of global industry is still in lockdown simply because people must maintain social distancing till somebody finds a cure for the coronavirus. Hence there isn’t much demand. And it’s just baffling that all this didn’t happen because of a systemic failure within the global economy, like 2008, but rather an out-of-the blue virus that spreads exponentially at lightning speed. It’s also pretty clear by now that things will simply not come back to normal until there is a medical remedy for Covid-19. So what if the uncertainty lasts for the longer term? If economic activity has been so mercilessly reduced to a trickle in less than a quarter, just where would the global economy stand if all this goes on for a few more quarters? Or even years?
Could it be really true that this pandemic has already changed the world as we knew it? Monday’s oil graph didn’t just show a commodity losing value all of a sudden, but also indicated an imminent job market collapse. Scenes of Americans in a number of states brandishing automatic weapons, defying social distancing protocols, and demanding opening up of their economy seemed almost surreal. But they also explained the desperation of individuals and families struggling with financial ruin just down the road. The prospect of a global army of unemployed, no longer able to pay their bills and children’s school fees, cannot really be ruled out unless, of course, there is a decisive victory in the laboratory. Meanwhile getting everybody back to work in these circumstances, as US President Donald Trump seems eager to do, is only a smart idea so long as the virus does not suddenly start spreading among the workers as well. Surely everything would have to be locked down all over again, and the disease would have spread that much further. What do you think would happen to oil prices and world markets then?
Most analysts in Pakistan didn’t seem too pessimistic on Monday night, though. Since the country imports a good eighty per cent of the oil it needs, price destruction of a healthy magnitude is always welcome. But even as they smiled from ear to ear and expected the government to suddenly get all the fiscal space it needs they overlooked some very important points. Oil dropped, or rather is still in acute trauma, because of demand destruction and global economic shutdown. And when everything is closed there will be precious few buyers for our exports. Pakistan’s biggest export destinations are the EU and US, and to a lesser extent the Gulf region. So it would be a safe bet, despite all the fiscal space cheap oil gets us, that our exports will not do too well if their economies contract sharply. Our remittances, usually right up there with exports at around $20 billion annually, will also take a big hit. They come most from Gulf countries followed by the US and EU. With wages and jobs both shrinking in those regions, we should brace for a lot fewer people sending a lot less foreign exchange unless things get much better.
All this because a strange virus blind-sighted everybody, especially the markets, and killed an 11-year bull market, not to mention over 178,000 people all over the world. Perhaps the world will have a better fighting chance if all the countries commit most of their resources to the hunt for a vaccine.