Energy price rout threatens A$ stability

A negative price for US crude oil provided much fascination this week. The May West Texas Intermediate oil contract closed at -$37.63 per barrel on Monday. But the benchmark contract today is quoted at $17, indicating the quirks behind the negative price as the contract expired.

So negative prices are certainly not the norm for oil benchmarks globally, with the more influential Brent crude futures prices ranging from $21 in June to $32 for December. But the broad theme of massive pressure on oil prices is correct.

The Aussie dollar isn’t traditionally seen as being at much risk from low oil prices given that Australia is a net importer of crude oil. But liquefied natural gas is now our number 3 export and its price is tied to oil. Moreover, coal prices are being dragged down by the oil rout.

Iron ore on the other hand is proving resilient, with prices holding around $85 per tonne and Australia’s export volumes rebounding in March. But the other 2 exports in Australia’s top 5 are education and tourism, which face an incredibly difficult year, with the government indicating that international travel restrictions will remain for many months.

The Aussie is roughly flat over the past week around 63 cents, still tracking global equity sentiment and confidence in emerging markets.

Domestically this week, the highlights were a speech by RBA Governor Philip Lowe and an update on retail spending.

The ABS reported that retail turnover surged 8.2% in March, the largest monthly rise on record. This should not have surprised anyone, given the widespread reports of panic buying of consumer staples and supermarkets having to hire more staff. 100% increases in purchases of the likes of toilet paper and pasta outweighed the early signs of damage to cafes and restaurants, with strict laws on this sector only being imposed around March 23rd. So April’s report is likely to be very grim.

Indeed the second quarter will surely produce the worst economic data in decades. Governor Lowe suggested that Australia’s GDP could slump by 10% in the first half of 2020. In the scenario that physical distancing rules are eased gradually in coming weeks, the RBA suggests GDP could recover about 4% in the second half of the year, then accelerate by 6 or 7% next year.

This profile is roughly in line with Westpac’s outlook for 2020 but we see a more modest 4% expansion in 2021. One factor in play is that with Australia’s borders effectively closed, population growth is likely to slow substantially.

In the week ahead, Australia’s data highlight is Q1 CPI. With petrol prices tumbling and lower childcare costs, the RBA projects Australia’s overall inflation rate to turn negative by June, which would be the first such decline since the 1960s.

Other calendar highlights in the week ahead are policy meetings by the US Federal Reserve and the Bank of Japan. Both banks are of course already pursuing aggressive monetary easing but there could be further steps. We will also see the advance estimate of US Q1 GDP. Markets expect the biggest contraction since 2008 but unfortunately Q2 will be much worse.