07 March 2021
Source: Bloomberg & Momentum Global Investment Management
What this chart shows This chart shows the Brent crude spot oil price since December 2019. The price dropped sharply in Q1 2020 under both demand (pandemic) and supply (Russia-Saudi Arabia price war) side pressures. It fell 71% from December 2019 to its trough on 21st April 2020. Also of note, but not shown here, is the performance of US WTI oil, which dropped from $61 in December 2019 to its staggering trough of $-38 on 20th April 2020. Sellers couldn’t even give it away for free! The reasoning was a panic around storage as demand collapsed amidst the coronavirus pandemic.
Holders of physical barrels had nowhere to store the oil and thus became desperate to sell their positions, offering money for buyers to take the commodity causing the price to collapse. The reason that WTI oil went negative but Brent didn’t is a technical one: WTI oil futures contracts (which prices are based on) are physically settled, whilst Brent contracts are cash settled, meaning there is no physical delivery of oil. Since the trough in April oil prices have staged a rapid recovery, particularly since October and prices now sit around pre-pandemic levels.
Why this chart is relevant
Prices have been supported since the pandemic by OPEC’s production cuts. They agreed in April to thelargest single output cut in history. The record cut of 9.7 million barrels per day began on 1st May, though was scaled back in August.
The price increase over recent months has contributed to higher inflation expectations and commodity-related stocks are in turn seen as one of the beneficiaries of the reflation trade, boosted by vaccine news and prospects of eased restrictions.
Oil’s recovery has benefitted global energy stocks in particular: the MSCI World Energy index is up 63% since October 2020 compared to the headline MSCI World index up 22%. This has also provided a tailwind for value managers who have greater exposure to the sector after several years of underperformance.
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