Expert Commentary

The True Deflation Impact of a Negative Oil Price

It made shocking headlines, and that's the point. In deflation, the unthinkable can happen.

This week's mainstream media hullabaloo over the negative oil price had seasoned market pros chuckling. You could see the utter confusion on presenters' faces as they reported that oil had gone below zero. The very concept is anathema to almost everyone. People asked, does that mean we get paid to fill up our car with petrol?

Of course, market pros knew that the negative price was a technical aspect with regards to delivery months and storage capacity. With nobody wanting to take physical delivery of oil at the expiration of the May contract due to no storage capacity at Cushing, OK or anywhere else, anybody left long wanted out at the same time.

However, it is the psychological impact of negative oil that is the main story here. Back in 2011 when oil was still over $100, Robert Prechter forecast that the price would eventually move below the 2009 low. He was correct. And by now falling below zero, it's a bucket-of-water-in-the-face wake-up call for people who think that deflation can't happen. That's pretty much everyone. And not only can deflation happen, it HAS BEEN happening in commodity markets since 2008 when the CRB index peaked.

Japan has been deflating for 30 years, Europe for 20, China and Emerging Markets for 13, and commodities for 12. The focus of the Great Deflation is now on the last man standing, Uncle Sam. Credit markets are under continued strain despite the Fed's actions and now Exchange Traded Funds could be in the eye of the storm as oil-related ETFs blow up.

People now realize that the price of, not just the return on, assets can trade below zero. That's a deflationary Rubicon that has been crossed.

200422 - MG