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Doomsday in the oil market

23 April 2020

This week has already gone down in history as the price of the May futures contract for US WTI oil fell below zero. The historical low was fixed below -$40 a barrel. Today, the June futures are trading at a record low of $6.5 per barrel.

The current situation can be explained by a huge oversupply supply and news that the largest oil storage facilities in the USA were almost full. Let me remind you that on Tuesday in an interview with Bloomberg, the financial director of the Rotterdam Royal Vopak NV, the world's largest independent oil storage operator, said that they had almost no free space for oil storage. Of course, other operators have a similar situation, which contributes to lower oil prices.

Against this background, we are witnessing a fairly strong weakening of commodity currencies, in particular the CAD. Thus, the USD/CAD currency pair, having strengthened by more than 250 points, reached the level of 1.4260. I would like to draw your attention to the fact that this growth was due to a weakening CAD, as the US dollar index remained basically unchanged.

Despite the issues in the oil market, which could lead to a series of bankruptcies in the oil and gas sector of the USA, Canada and a number of other countries, the demand for safe haven assets remains moderate such as gold where the price remains stable and we are seeing moderate growth after a pretty long decline. Also, the JPY remains quiet, which could indicate an increase in interest in safe haven assets or an escape from risk.

With all this yesterday, the Bank of America published an unexpectedly optimistic forecast for gold prices. The target for the next 18 months has been revised from $2,000 to $3,000, while the forecast for the average price for 2020 is close to current values - $1,695 and $2,063 in 2021. A prerequisite for the development of this scenario is the depreciation of currencies amid increasing risks for the largest central banks in the world. This forecast from Bank of America analysts can be interpreted as an extremely pessimistic forecast for the further development of the global financial crisis. 



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