By Samuel Shen and Tom Westbrook
SHANGHAI/SINGAPORE (Reuters) - The crash in U.S. crude prices has turned a reliable commodity less than worthless and given fresh urgency to bearish voices, who say it sounds alarm bells for global growth and are bracing for a catastrophic collapse in asset prices.
Markets are already unnerved at the spectre of traders paying to give away May futures contracts for West Texas Intermediate crude (CLc1), as storage tanks at the delivery point in Oklahoma quickly fill with unused fuel.
But some market participants believe the transformation of "black gold" into a liability is more than a bet gone wrong, and rather heralds a new round of deflation and financial destruction as the COVID-19 pandemic wrecks the world economy.
"This is part of the deflation process," said Murray Gunn, head of global research at market forecasting firm Elliott Wave International.
"At this juncture, our analysis suggests that this is very probably the second wave of a much bigger fall...over the next two or three years we will be in a deflationary environment. Survival will be paramount. And cash is king."
The crash has already knocked the wind from a rebound rally that has taken the MSCI World Index (MIWD00000PUS) up more than 20% from March lows, sending Asian shares on their steepest tumble in a month and U.S. stocks sliding two days in a row.
Those preparing for worse to come see a slew of more fundamental problems ranging from oil speculators going bust to the destruction of the U.S. shale industry and a credit crunch if energy firms' bad debts grow and banks tighten their belts.
"What we're seeing here is this fast-forward recession," said Patrick Perret-Green, head of research at AdMacro, a boutique research and investment advisory in London.
Trading losses can quickly spread risks outward to banks, who are likely to respond by lending less, he said.
"Then the question is do they then start re-evaluating other things? So, all commodities trading, copper, the whole shebang...we're reading the fundamental collapse as something not just for oil but for everything."
(Graphic: US oil plunges, amplifies economic concerns link: https://fingfx.thomsonreuters.com/gfx/mkt/oakpeknyprd/Pasted%20image%201587473526227.png)
OIL UNDER WATER
The price crash also reflects the near total absence of energy demand - once regarded as constant.
While that has some hoping cheap fuel could subsidise a swift return to global growth, it also means relief could be distant indeed for exporters and economies reliant on them.
"For front-end prices to recover...we first need storage to normalise which will require demand above supply," said Diego Parrilla, who manages Quadriga Igneo, a $325 million fund designed to profit in turmoil, which is up about 50% this year.
"That will require massive cuts and/or demand growth, both unlikely in the near term," he said, predicting big losses for oil bets and even the possibility of greater global tension between the oil producing United States and importer China.
To be sure, not everyone is forecasting gloom, with OCBC economist Howie Lee calling the crash "not the end of the world" and not reflective of the entire market, since global benchmark Brent prices (LCOc1) have at least not dived so far.
And the U.S. Federal Reserve has thrown so much cash at credit markets that contagion seems unlikely.
But the effects on the industry globally, and especially U.S shale producers who depend on U.S. crude futures in the low $40s per barrel to break even, are deleterious and could weigh on growth if their usually huge capex spending vanishes.
"At these prices, the entire industry is underwater," said David Winans, a credit analyst at global money manager PGIM.
"The 'supply shock' from the OPEC+ collapse in March was really a mirage, the demand shock from COVID-19 is overwhelming everything."