Crude Reality Shadows Soaring Job Losses

04/06/2020 10:30 am EST


Adam Button

Co-Owner and Managing Director,

Friday brought huge job loss news and a surprise crude rally. Only one is likely to persist and its not higher crude prices, reports Adam Button.

U.S. employment fell by 4x expectations, showing a 701K decline in March, but this was not the story of from Friday. A 40% intraday rally in crude oil following a series of remarks and tweets from President Trump that also helped the Canadian dollar. 

US Crude shot up nearly 40% above $30 from a two-decade low after President Trump managed to intervene verbally in oil by claiming producers will step up with massive output cuts. Traders (and us) remain in doubt as to whether a global deal can really be done.

The U.S. President's infatuation with exaggeration and half-truth struck the oil market Thursday. After tipping off CNBC, he tweeted that he expected Russian and Saudi Arabia to cut oil production 10-15 million barrels-per-day bpd.

Even with all of OPEC included, a 10-15 million bpd cut was an enormous sacrifice. Soon after Russia revealed it hadn't even spoken to Saudi Arabia. Crude fell back to $24 but rose again when the Saudis called an emergency OPEC+ meeting.

Yet, the statement from Saudi Arabia hinted at the truth: The plan was to call for all oil producing countries to work together to cut 10-15 million bpd. That is a monumental task that's a longshot at best and crude fell to $23.50. Still, the market held out hope when Texas, Mexico and Alberta officials hinted that they were interested in cooperating.

Later, Exxon (XOM) said it wasn't interested in cooperating with anyone. They've avoiding shale for years and have the balance sheet to withstand this slowdown. No doubt they want to buy assets later for pennies on the dollar. Their stance makes it highly unlikely the United States will cooperate.

The hard reality is that it might not even matter if they do. Trafigura estimates that Coronavirus has cut global oil demand by 35 million bpd. Low estimates are at 20 million (bpd).

Oil is unlike other commodities because it's difficult and costly to store. Every country has some reserves but 1 million barrels are tough to store. 35 million barrels per day is an impossible glut. A look back at the major inflection points in crude shows that a 1% to 2% over or undersupply can dislocate the market over time. Current oversupply is 30%.

There are two solutions: Solve the virus or let the market sort it out. This rally could extend to $37 on further optimism or OPEC+ jawboning but it's ultimately doomed.

U.S. nonfarm payrolls collapsed by 701K, the biggest one-month drop since the financial crisis, while unemployment jumped to 4.4% from 3.8%, posting the biggest monthly rise since 1975. Most crucially, the jobs figures were based on the survey week of March 12, meaning it missed the bulk of job losses and the subsequent two months will be markedly worse.

Watch this space for a conversation with Ashraf on Trends in Yield Differentials

Adam Button is co-owner and managing director of and a contributor at You can see Ashraf’s daily analysis at and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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