April 20, 2020, will go down in history…
It will be remembered as the day the oil price went negative.
That may sound impossible.
Oil costs money to extract from the ground. So how can it sell for a negative price?
But that’s exactly what happened yesterday. As Bloomberg reported it…
The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory – minus $37.63 a barrel.
Don’t worry about the jargon. I (Chris) will unpack it for you in today’s dispatch.
I’ll also show you why the plunge in oil, while a clear signal that all is not well in the world, is also an opportunity for patient speculators.
We’ve seen a surge in our readership since governments have issued stay-at-home orders for hundreds of millions of people across North America.
That’s no surprise.
Here at Legacy Research, we bring you ideas about growing and protecting your wealth that you won’t find in the mainstream media.
And with a virus on the loose… and the press in hysteria mode… that’s more important than ever.
As our cofounder Bill Bonner once put it, watching the mainstream news is like watching a bad opera.
You can tell from all the shrieking that something important is supposed to be happening. But you’re missing the plot entirely.
Here at Legacy, we thrive as a business when our subscribers thrive.
We don’t try to scare you. Our job is to help you stay rational… protect your wealth… and take advantage of speculations.
With that in mind, let’s take a look at what happened with oil yesterday.
There’s some truth in that. Let me explain…
Crude oil futures contracts are best thought of as a kind of financial pass-the-parcel game.
These contracts give you the right to buy 1,000 barrels at a specific date. Investors trade them back and forth as a way to bet on moves in the oil price.
But whoever owns a contract on the day it expires is obliged to take physical delivery of the oil.
The minus $37.63 price that Bloomberg quoted was for May futures contracts. And they expire today.
That means whoever is left holding these contracts will have to take delivery of their barrels today and store them somewhere.
First, there’s a shortage of storage capacity for oil.
Second, the refiners – which turn crude oil into gasoline, diesel, jet fuel, and other products – are turning barrels away.
This double whammy has made these May oil futures contracts hot potatoes.
Investors left holding them don’t want to have to take delivery of the oil. So they’re paying other investors to take it off their hands.
When the price of oil is $1, they’re paying $1 a barrel to buy a contract and take delivery of the oil. When the price is minus $37, like it was yesterday, they’re paying $37 a barrel to offload each contract.
So there’s something to the argument that this is just a glitch in market mechanics.
With so many people under government stay-at-home orders, oil demand has collapsed at unprecedented speed.
That means inventories aren’t being drawn down. Barrels are sitting around in storage facilities as a result. And storage capacity is maxing out.
The plunge in oil demand is also why refiners are turning away barrels.
So sure, you can make the case that issues with storage capacity and refiners caused the plunge in the oil price.
But these issues are themselves the result of oil’s weak fundamentals.
It’s all in this next chart from the number crunchers at Bespoke Investment Group.
Source: Bespoke Investment Group
It compares the market values (aka “market caps”), in billions of dollars, of the four biggest stocks in the S&P 1500 – Microsoft, Apple, Amazon, and Google parent company Alphabet – with the four smallest sectors.
As you can see, the market value of all the energy companies in the S&P 1500 ($701 billion) is about half the market value of Microsoft ($1.35 trillion).
And even the least valuable of the four Big Tech companies – Alphabet ($881 billion) – is worth more than the entire energy sector.
A quick glance at MarketWatch (I’m typing these words at about 1:30 p.m. Eastern Time) shows that a barrel of West Texas crude – the main U.S. oil benchmark – is $7.67.
It won’t stay like that forever. That means a bet on higher oil prices from here is almost sure to pay off.
But this kind of bet will require patience.
As we’ve been showing you, the coronavirus panic will end. Markets and the economy will recover.
But we could be looking at an 18-month timeframe – or however long it takes for a vaccine to become available.
We’ll leave this subject with the insight master trader Jeff Clark shared with readers of his Delta Report trading advisory this morning. Jeff…
The action in the oil futures market is simply amazing. Undoubtedly, in the days ahead we’re going to hear stories of some hedge fund, or other large traders, who got caught on the wrong side of this move and lost everything. There are some remarkable values being created in the energy sector because of this action. But it’s far too early to try to bottom fish in that pond just yet.
The S&P 500 – our bellwether for the U.S. stock market – is up 23% from its lows.
That comes after a 34% peak-to-trough fall.
A lot of folks are betting on stocks hitting new highs real soon. But that doesn’t jibe with what we’re seeing in the oil market.
And Jeff has been warning his readers that we’re in for an “aftershock” of the coronavirus crash. It could take us far lower than the previous dip – meaning another lurch lower for stocks over the short term.
But you don’t have to be a victim. Jeff will be applying the same crisis trading playbook that allowed his readers to double their money 10 different times in the 2008 financial crisis.
And from what he’s seeing now, he believes his readers will have even more opportunities than back then.
Tomorrow, he’s putting on a presentation to give you the full details.
As a Daily Cut reader, you can reserve a spot here for free.
Until tomorrow,
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Chris Lowe
April 21, 2020
Dublin, Ireland