Oil Price Crashes Overnight As Volatility Continues

OK, very good morning to everyone. Monday the 9th of March. Hope you had a good weekend. And obviously I turn on the briefing this morning and we're in for a big session ahead. If not already have seen this last night where oil prices have collapsed south of $30, a move of 30-odd percent. U.S. stock futures are still limit down at the time of me broadcasting this, that being from a points point of view in the Dow futures just short of 1,300 points, the S&P down 145, i.e., 5%. So yeah, really big moves. Predominantly two factors. One, the reasoning behind the oil price, which we're going to discuss, which you can see here, the actual overnight move is the largest that we've seen since 1991 Gulf War, when price battle has erupted, that being between Saudi and Russia, which I'm going to go into in a bit more detail shortly. But the other thing, of course, is the coronavirus, still a kind of clear and present danger for markets as it continues to spread kind of globally. And some updates there that I'm going to go through as well. Then I'll hand you over to Sam to look at the charts in more detail. But Just to kind of quantify what this looks like from a cross-asset class perspective, so you can see here I've put the 3 major US indices from left to right: Dow, NASDAQ, and E-mini S&P, all on limit down at the moment. If you're new to that type of terminology, I will explain that as well shortly, but that's led to a kind of traditional flight to quality bid at least into US T-notes. The T-note is up, uh, 2 points and 4.5 ticks already. I can't really remember much beyond 2008-2009 the last time I've seen that in the US 10-year in an overnight session. You know, that's a, that's a huge move. And so we're trading at 140. So US yields down at record levels once again. Gold actually did move higher in the overnight session. However, as per what it's been doing kind of the last real two Fridays when we've seen some really whipsaw price action. Similar thing happening during the Asia-Pacific session, it did sell off quite violently, more than $40. However, has recovered again. So yeah, one of the main things to put out there today, I think if you are a new trader or let's say lesser experienced, as much as you know, you could see all the headlines and the drama unfolding. It's a very dangerous market to trade if you're not kind of refined in an ability to manage your risk, execute in the right fashion, and pick your moments correctly. It can be quite devastating from a, from a trading point of view. So all I would say is all of these episodes like we've had in the last 2 weeks are fantastic learning situation. So if that is you and you fit within that category, you know, then don't feel a kind of necess— necessity to really just jump in the market quite blindly. Because as you've seen, like with what I've just described with gold, it's incredibly volatile at the moment. And so yeah, a few things Sam's going to point out, some levels, because those who are experienced, then this is kind of a, kind of a real challenge, but certainly an interesting one, and one there, there are opportunities. And so let's just run through a few different things. I'm going to kick off with oil, starting with the oil chart here, because just to add some perspective to what we're looking at, and this is looking at the— well, let's put it on the daily. So what you can see here is I've put a rectangle where we've had the gap down, and obviously this really, this move began on Friday. We had a real collapse in prices. I think the move was in excess of 10%, and we broke through that key area, which was the low point that we had at the end of 2018. And obviously all eyes and ears were on that OPEC meeting. And in summary, as we were kind of calling for midweek last week, we were quite bearish on the outcome of what we thought would happen at that OPEC+ meeting, and almost felt like Saudi had set themselves up for failure by being so bold with this calling of a 1.5 million barrel per day cut, because once you put numbers like that on the table and the market now expects— and not only did they not agree to cut that amount, the Wall Street consensus was though for a cut of 750, but in the end it was a complete breakdown, uh, is what we saw. And actually then what this has led to is over the weekend there's been an FT article, and according to people familiar with the matter, The Saudi Arabia, uh, strategy now is to punish Russia for this episode. They're going to start increasing their oil production. They roughly produce around 9 million at the moment. They've said that in a month's time they're going to ramp that up to 10 million and then followed to 11 million, whilst also providing all new customers with a 20% discount just to get at the Russians and also the US shale industry. So this is— I mean, I really struggle to see the sense behind this move. It's almost like pure anger and revenge that they're trying to put out there to counteract then what's happened at the end of last week. But this is what's caused this catastrophic fall in oil prices, because this now is an all-out price war, and hence those kind of headlines that has erupted. And not only this against the Russians, but how are the Americans going to respond to this? Donald Trump hasn't really said too much as yet about the economy, but if you think about it, think about oil prices down at these levels and what that means for a number of the big oil majors. Now, most oil majors in America generally need oil to trade at around a $40 or so price point as an absolute minimum. If you think about it, US oil production has, has grown almost exponentially over the last few years. A combination then of the kind of the Trump administration's view about greater oil independence, the ability to export oil with the rule change that happened a few years ago, but also the ability to be able to frack more aggressively given the lack of real environmental focus from the existing administration. And that's meant that all these oil companies, in order to take advantage of this huge rise in ability to sell oil to foreign shores, has meant that they've borrowed a lot of money. So the problem that you have here, of course, is then— and the thing to watch today is these oil firms are going to get really hurt, particularly kind of the less matured ones of a smaller size, of a lower credit rating. They're the ones that are gonna really feel the pain and gonna be at risk of bankruptcy. It's probably gonna lead to a real slashing of dividends. The question mark being, can they cover their debt payments with their available free cash flow or not? And some are just not gonna, not gonna make it when oil's trading down at these levels. Now, this is all prompted by what Saudi have done and what Russia have done. So how is Trump gonna react is quite key here, because if you think about it, If these oil firms start going out of business, well, that means the unemployment rate is gonna start ticking up, the equity market's collapsing. This is not what Trump needs or wants in a year of which he is campaigning to try and secure a second term when he's pinned such kind of hopes on to validate his success of his policies on these types of more binary metrics that we measure in an economy. Yeah, looking at oil here, you can see where before Trump has been vocal to kind of verbally intervene at around this level at $42, but we are way below that at the moment, a good $11 below that level. If we look at oil on a monthly chart, this does bring into play a really interesting level, and that is on the— I'm looking at a monthly candlestick now, and this is $26. $26 is what we printed back in Feb of '16. And there's a chart I wanted to share with you, which is this one here. I've taken a snapshot here of the price of crude oil going back in 2014, 2015, 2016. Now in 2014, generally oil prices were trading north of $100, was quite common. However, during this period, this is where I guess the shale industry in America was much more in its infancy but was increasing quite quickly. And there came a choice from OPEC, chiefly led by Saudi Arabia, of course, was does OPEC now cut production in order to offset then the pressure of an oversupply nature of a market with the US bringing more online? And this is the, the main annotation here is in the top center. On the 27th of November of 2014, basically OPEC took the step where they decided to keep output steady. Despite that supply cut, their main kind of core of their strategy was, well, look, we'll just flood the market and we will, we will kill off this, this US shale industry, which at that point the breakeven price was much higher than where it is today in 2019, 2020. Now what happened there was the— it did have a degree of impact. The number of operational rigs in America decreased quite substantially, but what they underestimated was the flexibility of that industry in North America to withstand and weather this storm. And what happened was, is that the efficiency on these individual sites was way better than what it was. And so a real, a real policy mistake from OPEC. And this then also fell in step with the same situation where China's economy started to see a continuous downturn with risks of a hard landing. It almost sounds reminiscent right now of the same thing, given the Chinese— the coronavirus impact on the Chinese economy and the significant impact that has obviously on consumption for oil. So here, just to give you some context, between OPEC really making that decision and around when that came, we were going kind of around the $100 price level. And actually, when we got to 2016, I think it was February of 2016, we got here to that chart which I just showed you on the monthly, which was $26. Now overnight in WTI crude, we printed $27.34. So we're in a whisker of that price level already. But, you know, these are long-standing, really important levels on a much higher timeframe. You can see that $26 where it's acted on time. Look, if we go back to looking at crude oil since the mid-1980s, that level around $26 is, is key. So I guess what a lot of people are going to be looking at here, potentially from a, from a medium-term or portfolio positioning point of view, you know, could there be some good opportunity here for a long? Um, question I've been asking myself, but you know, when the market's moving in such flux at the moment. I think, sure, if you're thinking about a more long-term cash position, an unleveraged nature than trading a derivative, then, then sure, you would say that oil is not going to stay down in the 20s for long. But from a trading point of view, I think, you know, listening to Sam and the technicals in the day are going to be quite key. But when the markets reopen later, keep an eye on Wall Street because the likes of BP in the FTSE down 27% this morning. And you're likely to see that type of price movement when the US open later. The question being then is, as I said, what is— what has Trump got to say about this? Because he is not going to be happy. And think about the already sensitive relationships that he has in the Middle East with the likes of Saudi Arabia, the sanctions on Iran, you You know, what is going to be the outcome here? Because he cannot allow for these North American companies to go out of business. So something's got to happen. And how does he put the pressure on Saudi and the tension in that relationship? And then equally so with Russia and Vladimir Putin. All right. The other thing, of course, that is impacting all is the coronavirus. But before I get there, I thought I'd just finish off the oil chat with this one banknote. Come out of Goldman Sachs overnight, and they've basically said that they see oil going into the 20s. Their prognosis for the oil market is even more dire than that period that I spoke about in 2014 where the price war last started. It comes ahead with a significant collapse in oil demand due to coronavirus, as we've discussed. So everyone's, as we kind of saw last week, getting more and more bearish on this situation. Talking of the coronavirus, this obviously is the other, the big topic, and this isn't just a global response with the sell-off that we've had and the flight-to-quality bid on just oil. It also comes as we've seen a greater expansion of the numbers globally of the total confirmed cases and deaths of coronavirus, and we've known this for some time. The movement came, what, 2 weeks ago when it moved out of the boundary of mainland China into the likes of Italy, Iran, and South Korea. But in my mind, we've moved on now into a third phase that is spooking markets, and that is the fact that the number of confirmed cases in Italy now is north of 7,000. France and Germany is now above 1,000, and these are areas, of course, where, you know, any type of quarantine nature would have huge ramifications then for eurozone global growth. And then similarly expanding that out to include the UK, North America, the global economy outside that of the impact we've already kind of seen in that of mainland China. So another key thing here is Italy, and I'm not sure if you read it at the weekend, but basically over the weekend Italy have taken the unprecedented step of quarantining 16 million people. in the region of Lombardy, including the capital Milan, Parma, Modena, Venice. All these cities have been put on lockdown in a national emergency expected to last at least a month. And so anything where that includes major public spaces, maybe infrastructure related to travel, has all been put on lockdown. And this is obviously going to have a huge consequence on the Italian economy. And so much so, we've already seen this morning that the Italian Deputy Economy Minister started talking about the government considering extending the tax moratorium, talking about state guarantee scheme for banks. You know, they could be at real risk of a collapse which could have a systemic impact on their system. So now it's, you know, there was this big talking point before about will governments step up to the plate and provide fiscal to complement the monetary stimulus? I'm afraid now they don't have an alternative. They have to. So, you know, when I was looking at things like the UK budget and was there any preparation I needed to kind of, uh, convey to you guys, well, quite frankly, there isn't, because all the detail that there might be, it's all been overshadowed now about how is the government going to counteract the inevitability of the fact that probably the UK is going to experience similar quarantine-type measures. I don't really think it's too much of a question of if, but probably more when in certain parts of the country. So this is what's spooking the market. Remember, these things don't need to happen in a material fashion, just the risk that we think that they're going to happen is what we're seeing in front of us on our screens today. This morning. That, in addition to the OPEC+ meeting and the fallout in this price war that's now erupted, has caused this quite large scale of volatility that we've had. All right, a few other things. Quick look at this— I'm going to share this, uh, link into the, the chat, and I'll also put it on the video on YouTube when I post it. Obviously, in a day like today, I get a lot of questions about limit downs, because for a lot of new traders they never really have heard of this terminology. But if you look here at the S&P 500, you can see the overnight price action, and you can see this kind of flatlining on my candlesticks here. I'm looking on 30-minute candles, and you can see the same thing is replicated on both the NASDAQ and the Dow. And what that means is this market has hit limit down. So overnight in Globex Electronic trade, which opened last night. Remember, US clocks have changed, so the time differential between London and the US is shortened for the sessions ahead. And what this has meant then is that at the reopening of electronic trade, so outside of floor trading hours, markets can only move a maximum of 5%. Now what happens then once we go into Wall Street cash equity trading hours, so in Chicago that would be 8:30, New York 9:30, then what happens is that these price limits then kick in and correspond to the following 3 levels of price halts: 7%, 13%, and 20%. And so what you can do is when you're on this link, if you click on this button here, "View Price Limits," it then opens up this page where obviously I'm not interested in Bitcoin futures here where it defaults to, but if you scroll down you can type in equity limits and then just type in whichever index that you're interested in looking at. And so here the S&P 500, and it will pre-calculate then ahead of the open, well, what is the specific level for each index future you are trading where the limit halt would kick in, if that makes and you can see all the corresponding numbers depending on what contract you're looking at. So we'll go over all of that again ahead of the US Open because it's going to be particularly relevant for that session ahead. Final few things on that fiscal stimulus front. This was on Bloomberg this morning, so I thought I'd just quickly cover. The Trump administration is drafting measures to blunt the economic fallout from coronavirus. And help to slow the spread across the US, including a temporary expansion of paid sick leave and possible help for companies facing disruption from the outbreak, according to people familiar with the matter. Still yet though to hear definitive detail coming out of the US president. I am sure he's going to be vocal though on issues such as this and also specifically on the price of oil much later on today. I think his, his his strategists are probably just thinking about the game plan right now, and hence the reason he's held off so far. But it is coming, and it is going to be quite interesting and important for what he has to say. The other thing on this side is the central banks. You've got the ECB later this week, uh, on Thursday. And at the end of last week, I actually thought the ECB might hold off, just given their limit— or relative limited room for maneuver on their policy options. However, again, I think they don't have a choice now, uh, and I think they'll cut the, the rates again by a further 10 basis points. I think they'll look at targeted liquidity, uh, injections to help promote and stimulate, um, what can be quite, uh, tight liquidity situations in markets like we've seen in various episodes in the repo market in the US, uh, and then also they unveil their latest macroeconomic staff projections, of which I'd be anticipating downgrades. I don't think it would be unsurprising at all to the likes of growth for sure, and probably a slight tweak to inflation as well. So I mean, that is pretty much it. Um, just as a reminder, obviously every Sunday I do write a piece called the Macro Menu, which I'm just going to put the link into the chat now. And this has the full calendar of the week ahead. And so if you do want to see all the data points, speaker events, and so on, you can refer to that. And it also has a summary of some of the things that I've spoken about in this briefing. It will be updated with this video as well shortly after. All right, that's it from me. I'm going to hand you over to Sam. Let's hear what he's got to say. And I wish you a good day ahead. Thanks very much.

Hi guys, good morning. What an evening last night and obviously morning now. Start off with, uh, with oil. We'll get some of those longer-term levels up. I was just having a look at the, the spot market for oil, uh, and that low, uh, from 2016, the double bottom on the spot has been hit, and hence why we've had a decent recovery from then. So I'm just going to put this onto the weekly time frame and see just drag this over, move it up, and you can see as well here on the futures, while we did have a little bit more to go on the spot, it did hit those levels. So certainly when we— if I should say we have any further movement to the downside, just keep an eye on your spot charts as well because obviously that did offer a good level of support. Um, below there, certainly, uh, on below the low of the day on the futures, be aware of around $26.09, I think, to be precise, the low that we did get back there in February and January 2016. Below there, and yeah, that $20 can look to come through. There are quite a few lows as well, which I'll put into the chat later, worth having these marked up going back to the beginning of the millennium for oil. The way it's— it bounced from that low, it's already up well, $4 or so. I just, I suppose resistance levels, it's going to be tricky today because of how illiquid the market's going to be at each price. Obviously the volatility is going to be a lot higher, uh, but here is one just where we're trading now. You can see we have had a bit of support and now a bit of resistance, and we're already 20, 20 cents below that point. Um, is there much point in putting the pivots on? No, not really. If we were to get back up towards there, there's, you know, something that's most likely come out. But you can see a decent push higher here in oil from those lows, but still massively down for the day. And I mean, where we finished Friday, $42, you know, almost $10 down to where we're trading now, $9.50. But yeah, resistance levels, you know, that's something I'll be looking— and I looking for. I think if we were to get back below $30 bucks, then you might see a continuation of this move to the downside. S&P, I was just having a look next door, and we're at levels— well, obviously we'll see what happens once we open again, but we're levels traded back in August last year, which sounds crazy really, doesn't it? You say we're, you know, we come down all this way from the all-time highs, but we're only where we were August 2019, which is insane. Saying, is there more to come? You'd have to be of the bias that there should be, but that does not mean once it starts open that you click sell, you know. And with the speed of these, these movements as they're going to come through, you do of course, you know, not want to be going in full size because it could be over very quickly. I've seen tweets, you know, saying these— this is the potential to be the hardest day of people's trading careers. So if, you know, experienced traders are saying that, you know, take, take note. Above where we are trading, I would obviously keep an eye on those lows that we had from, um, from Friday, but also if we just scaled back down here around the low that we had from the previous week on the 28th of Feb, which was also the 2nd of October low. So I'll be keeping a watch on there for an opportunity if we were to find some strong resistance. That could be an opportunity to then get short back down towards these lows. It might not, however, give that opportunity, and then it's just worth marking up some of these levels that we did have from, uh, beginning of August after that Chinese devaluation, and then May as well. So yeah, it could be that, uh, you know, we get down towards these levels at some point soon. But predicting how it's going to do that is not going to be easy. Just mark up your key levels, wait for whatever confirmation you want if you want to get in, and I would go smaller size because these moves will definitely resemble your, your normal size through there. The DAX, which is currently, uh, open at the moment, you've got a nice resistance level that I'll be keeping an eye on here at 10,804. I like it. I think it's a good point that could be an area where people would look at the— looking back to, to get in, uh, to go short. So 1, 2, 3, breakthrough. Let's have a look, see how that holds up. I think if we were to, you know, 5-minute close below there or hit some nice resistance, then that could be something that I would like the look of. Above there, then, you know, these markets are not going to hang about. They could, you know, really push on. And, you know, next week's 80 points up and you're on the low that we had from around 6 clock. And you don't want it— you want to just accept before every trade when you're going to be wrong. And you know, if that happens, move on, go for a walk. Last thing you want to be doing is getting in and out these markets, getting involved in that chop, which is going to be there for sure. Currency— well, this I'm going to start, which is probably the first time I've ever started with this currency, the Kiwi, which you can see had a flash crash overnight across every single pair. Around 145. Insane move, uh, lower. Um, that's the lowest it's been. I'm gonna put this onto a weekly chart for that reason. That is the lowest we've been since May 2009. So an insane move there for the Kiwi, and it's almost reversed all of that. As an opportunity goes though, you know, across the board for those Kiwi pairs, once you do get a bit of reversal reversal, or more of a reversal to, uh, where that started, I think that could be a good opportunity for a short. So that's certainly something that I'm going to be keeping an eye on. The euro, uh, pushed higher as well. I know it looks nice here on this low that we had overnight, bit of a trend. Yes, we had a little false break early at 6 AM. I like the idea that if we break through that to the, uh, to get you know, potentially the gap fill, to be honest. So that's something I'm eyeing up. I know that's going against the recent trend of this market from those lows, and how insane that is, up to 115 in early trade this morning. Also levels not seen since March last year. So pretty, pretty crazy there. But yeah, in terms of the euro, I like the idea that if this trend line breaks, to get a short to go for that, uh, move lower And the pound, you can see, also benefiting from safe haven moves, which is also a bit, a bit unusual. But that's just coming down a bit as the dollar just tries to recover a touch. This is, uh, the highest the pound has been since, uh, earlier this year, early in Feb, late, late January. And I regret not getting long on that 14th of October long, uh, high even more now, but So yeah, up to 132, keep a watch on that. I do like the look if we can come back to 130.79, about 70 ticks away from here, was the highest we had for the 11th, 13th of Feb. I think the way I'd be looking at all different currencies, and let's have a quick look over at the yen, is identify your levels and if they don't come there, that doesn't mean, you know, you want to go chasing, you're looking for other opportunities. Put that planning and preparation in because, uh, you get involved. I mean, just look how big these ranges are. So a lot of what happens is going to be chop between, uh, all of those points. So yeah, identify your areas you're interested in and go from there. Similar trend here in the, the yen. This is the yen against the dollar. So if that was to break through, you could see something similar in the euro and we start to push down quite like these areas here, the high that we had in late trade yesterday when on the open, that could be an interesting point. But the yen just testing that trend line there, and the euro as well. So keep a watch on that because I do like the idea here if we can get a nice 5-minute close below, uh, this could lead to a further move lower. Gold up to $1,700, uh, earlier on, uh, but we're down 30 cent— uh, $30 I should say since then. Um, which is a bit worrying. You would be expecting gold to really have pushed on, and at the moment it's completely right now flat, uh, from, from where we, we opened up. And, uh, especially once maybe US equities open up, it'll be, be interesting to see what happens here. The, the worrying thing of it not being a bit higher means maybe we are going to have to come a bit lower first here if draw that up, that's the highest we've been since December 2012. Um, yeah, I guess through there, 1750 would be a point of interest, but before that, 1720, just because we had some resistance in 2012 December, which is insane to, to be even looking at levels, uh, like that. But if the dollar does strengthen a bit, euro come lower, uh, break of that trend perhaps, gold as well to follow follow suit and the yen to come off a bit. I don't know whether that's the safest play. It might be that you're just waiting for to, you know, get long gold a bit lower down. Nothing really wrong with that in, in the morning, you know. Remember Monday as well, it's always going to be tricky, let alone the fact that we've just had the, you know, the craziest open we've seen in a long time. Keeping an eye here on the DAX just to wrap it up. Around this point of interest, the low that we had around 1 to 4 o'clock before we broke through after quarter to 6— a quarter to 7, sorry. That for me is the key first resistance that we're going to see across equity levels. Can we hold there? If we do, then I'd be looking for us to drift back lower. Above there, we might get a little reprieve, and quickly as as well. Guys, as usual, any questions, please, uh, do let us know. There's going to be plenty of opportunities out there, but you do not have to, uh, go chasing on a, on a day like today. Be patient. Uh, size, uh, I would absolutely lower that because obviously these moves are going to be a lot bigger than what you would have been used to.