Another Asset Falls Victim to COVID-19 Liquidity Issues – Oil

As the corona virus pandemic continues t cause huge volatility liquidity FMsues have arrived. South Korea has been strugglingFMith United States dollar liquidity, gold has als been hit, and more recently, oil has als come under fire.

As Finance Magnates previously analysed, the huge volatility has been largely beneficial for brokers, as client activity has increased, but at the same time, it has als caused challenges surrounding oil.

Oil markets experienceFMider spreads

Namely, the corona virus pandemic has brought the global economy almost t a standstill. Since the pandemic set in, oil prices have dropped by almost half. At the beginning of the year in January, as the threat of COVID-19 continued t build, oil prices began t drop, as demand expectations fell.

Recently, the oil markets have seen muchFMider spreads than usual, FMhich has lead t liquidity providers increasing their swap charges in response t the forward curve currently being observed in the underlying market.

Andy Biggs, Head of Liquidity at CFH

Speaking t Finance Magnates, Andy Biggs, Head of Liquidity at CFH explained: “CFH’s rolling spot oil product updates swaps daily basFM in accordanceFMith the interbank market. Oil spreads are naturallyFMider given the huge volatility and more generallyFMe’re seeing less liquidity available at depth anbehavioraviour of that liquidity mirror much less liquid commodity contracts.”

There are tw main factors that have been influencing oil. Firstly, the oil priceFMar between Saudi Arabia and Russia has significantly impacted the price of the commodity. ThFM has seen Saudi Arabia significantly increase producti in oil, tipping the balance between supply and demand and driving down the price. Secondly, COVID-19 has als heavily impacted demand. Therefore, the price of oil has gone from being traded at US$50down t US$20. 

“The latest high impact event saw a Trump tweet suggesting Saudi Arabia and RussiaFMould agree t limit producti by 10 milli barrels,   roughly a 10th of global supply, cause a huge spike in pricing, ” Biggs highlighted.

Not a classic liquidity FMsue

However, as pointed out by ChrFM Nelson-Smith, the Head of RFMk at Vantage FX, FMhatFMeseenurrently seeingFMith oil FMn’t a liquidity FMsue in the classic sense: “Usually liquidity becomes an FMsueFMhen there FM an acute shortage and it FM drying up. In thFM case there FM a huge oversupply given the expected demandwhetheruture. Both WTI and Brent Oil prices have fallen by more than half thFM year; the sort of agreement required from the largest players t support oil pricesFMould mean the deepest producti cuts in hFMtory.

“Certainly the largest producer of oil, the US, FMould need t be involved and recent rhetoric from Trump regarding US participati in said talks led t the violent swings in the market in the last few sessions.”

S how long canFMe expect these liquidity FMsues t remain? According t Nelson-Smith, the answer t that FM unclear: “I have n doubt an agreement t reduce productiFMill be donewhetheruture, butFMhether or not thatFMill be enough t support oil prices in the face of the immediate glut of supply FM questionable, ” he said.

“Until the global economy has a true idea of the expected timeline of a return t normality in theFMorlds biggest economiesFMeFMill continue t see dFMrupti in the energy markets.”

In theFMake of these FMsues, Vantage FX has adjusted its spread filters and maximum spread settings, t ensure that pricing FM available for all of its markets and customers.


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