Future Life Wealth Management MD discusses what negative US oil prices means for the global economy

Published by Scott Challinor on April 21st 2020, 11:11am

During the week that US oil prices plunged into negative numbers for the first time in history in the wake of the Covid-19 pandemic, Future Life Wealth Management managing director Jillian Thomas discusses what this could mean for finances and the global economy.

Writing on the firm’s business blog, Thomas said: “I have a shipping app on my phone, and this can tell you an awful lot about what is going on in the world before the mass populous catch on”.

Interestingly, Thomas’s app informed her that a drop in oil demand was already underway before the global Covid-19 lockdown came into force.

Thomas wrote: “Over the last couple of months…oil tankers and carriers were at anchor in strategic parts of the world waiting for orders. Not just one or two, not hundreds, but thousands; located off Rotterdam, off the Gibraltar Straits, and particularly off the Gulf coast at Fujairah and Sharjah.

“These numbers over the past ten days have escalated further, as we see the impact of planes not flying, and us not getting in the car to go to work or out for dinner.

“There is a huge glut in oil supply already in the global system, with an estimated 60 per cent of global oil storage at capacity. The storage for oil has become a valuable commodity and is becoming increasingly scarce around the world, with very large crude carriers at sea and at anchor doubling as storage facilities.”

In the backdrop of these issues, there has been some discord over oil prices between Russia and Saudi Arabia, which fuelled the decision made by the Organization of the Petroleum Exporting Countries to slash global production, as Thomas elaborates.

“A truce was recently hatched [between the Saudis and Russians] which saw an agreement by OPEC+[Organization of the Petroleum Exporting Countries] to cut global production by ten million barrels per day in May and June, followed by slightly lower reductions for the rest of the year.

“But even at lower production, there is not the demand for the oil being brought out of the ground, and the longer the lockdown continues the required volumes diminish.”

The next development was that US oil prices plunged into negative numbers, a technical effect brought about by how oil trading contracts function. Yet, it was something which investors were unprepared for, as Thomas explains.

“Last night, we saw the headlines that US oil prices have gone negative. This is a very technical development that most investors don’t have direct exposure to.

“We are already starting to see knock-on effects as the price for a litre of petrol has fallen below £1 at the pumps, and the cost of delivering goods has reduced. This is good news for the overheads of our supply chain haulers.”

Yet, Thomas warned of a potentially significant impact falling fuel prices could have on tax revenue.

“In the UK, the amount of tax on fuel is related to the price of fuel at the pump. The lower the fuel price, the lower the tax take. This is coming at a time when the Treasury is bankrolling the economy.”

There could also be a knock-on effect in the Scottish National Party’s endeavour to secure a second independence vote for Scotland.

Thomas explains: “The rapid fall in the price of oil could see the quest for a second independence vote for Scotland muted for a while, since the calculations in the initial independence vote were based on the fiscal forecasts and the survival of the Scottish economy on $100 per barrel of oil.

“The virus is having an effect far and wide and on many issues that we might not have expected. It is going to be a very interesting few weeks and months to come.”

What is for certain, is that the Covid-19 outbreak has brought about unprecedented uncertainty, dwarfing that posed by the Brexit conundrum which had dominated headlines over the last four years. As Thomas indicates, the coming months certainly will be a fascinating but testing time for all.

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Authored By

Scott Challinor
Business Editor
April 21st 2020, 11:11am

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