April 20th and 21st, 2020, will always be known as Black Monday/Tuesday in the oil patch. West Texas Intermediate Crude (WTIC) oil prices crashed -40% and went negative for the first time in history. Oil finishes the week with a -32% crash. Oil was at 150 in 2008 and at 110-120 during 2011-2014. The world was already well-supplied by the top three producers, Saudi Arabia, Russia and the United States, when the coronavirus hit. Global oil demand went straight off a cliff. People are sitting at home and not driving and factories sit idle. The big CAT bulldozers and high-lifts sit idle at construction sites.
As if the double-whammy of oversupply and a demand-shock is not enough, the Arabs and Russkies decide to battle one another in a price war. As oil price dropped, Saudi Arabia and Russia sharpened their barbs towards one another which softened price further. The two rivals then realized they could crush the US oil shale industry, perhaps splitting up that pie for themselves. This is tricky business since the Saudi's need the US military to protect their robed-butt's in the dangerous Middle East.
Another factor in the oil crash is the May futures contract expiring 4/21/20. The heaviest trading volume was on Monday. The crash was a cascading event from Sunday evening when futures opened into Tuesday with the lows in the futures on Monday; stock market derivative plays bottomed on Tuesday. Trading volumes are lower in recent trading days exposing the market to volatile moves. For expiration, traders must take delivery or roll the contract over (which is typical). If delivery is taken, that will be at the Cushing, Oklahoma, USA, terminal and tank storage farm. Cushing tanks are filled to the brim. Well, actually, at the current rate, they will be 100% maxed-out in a week or two. You can imagine the price you must pay to store a barrel of oil there now; rumor has it that it costs an arm and a leg.
Cushing is the largest oil tank farm in the world. So the world is standing knee-deep in oil with nowhere to put it. The refineries are reducing capacity since the gasoline storage tanks are filling up fast. Contracts will be pushed down the road and oil will likely remain in the 20's or lower for the next three months.
So mix all this stuff together into a perfect storm, add a volatile stock market, and voila, history is written over the last week. Oil prices fell through the 20-day MA at 21, the last line of support, so the rout was on. This continued the slide from late last week. Then, Black Monday/Tuesday occurs printing three black crow candlesticks during the fateful period. Note how price back kisses the 20-day and then it was lights-out. Goodnight Irene, Irene goodnight.
The crash is epic with oil prices amazingly going negative down to -$40. Jaws drop. Some machines had trouble handling negative prices. It was strange watching contracts trade where the screen was green for a rising oil price but the price was still negative. The options trade negatively. No trader ever thought oil would exhibit this price behavior in their lifetimes. Oil recovers on Wednesday, Thursday and Friday now sitting at 17. It is shocking stuff that is still hard to get your head around.
Tankers, laden with oil, are sitting in the oceans out away from the docks. There is nowhere to put the stuff. There's no room at the inn. Thus, a supply-glut, demand-shock, price war, contract expiry and coronavirus negativity conspire to drag oil prices negative. Unbelievable.
As a regular Joe Blow and Jane Doe, the drop in oil prices obviously leads to lower gasoline prices which will help the family budget. But as the old oil field joke goes, 'gasoline prices go up like a rocket but down lie a feather'. You must factor in your state taxes that are part of the gasoline price at the pump; all states are different. So, unfortunately, gasoline will not be going down to zero or negative, wouldn't that be great, since state taxes, fuel taxes, etc...., places a bottom in the gasoline price.
With oil prices crashing, traders looking for opportunities are eyeing USO, the largest oil exchange-traded fund (ETF) but investors, especially novice folks, should avoid the oil patch. USO has suspended creations of new shares. USO tracks the oil price futures and the managers had to change their criteria during the negative move in prices. USO now buys futures contracts in any forward month. Ma and Pa needs to stay away from USO. It may be a dead-man walking. The regulators are now monitoring and involved with USO daily.
Lots of traders, especially inexperienced souls, are running into USO without understanding all these problems occurring in the background. Even if oil prices perform a moonshot higher, do not expect USO to run that much higher. Simply stay away from the oil patch; there are plenty of other things to trade.
Another WisdomTree triple-leveraged oil ETP (exchange-traded product) instrument goes belly-up like two others a month ago. Keystone has told all of yinz for many years not to play any 3x ETF or ETN. Period. Those instruments are only designed for you to lose your money. If you want to speculate or are willing to take on higher risk, then dance on the wild side with a 2x ETF but tread softly there as well. For example, in these whipsaw markets, with stocks reversing direction every day or two, the 2x ETF's will eat you alive. Choppy sideways market moves chew up bulls and bears alike.
Oil is a vital key to US national security. No one wants to see the oil shale industry suffer, especially since those are high-paying jobs that also support ancillary jobs like the local doughnut shops, restaurants, copy centers, office supply stores and metal parts makers. Nazi Germany lost WW II because of their broken down fuel lines and lack of supplies. So the US must provide support for the oil industry from a security standpoint. However, what should be coming obvious to all folks, is that there is simply not enough money to bailout everything and everyone. President Trump is going to have to make a lot of tough decisions going forward and is already saying he will offer a lifeline to the oil patch. The oil-glut and demand-shock, with a little coronavirus sprinkled on top, is devastating to the oil industry. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
Note Added Tuesday Morning, 4/28/20: WTIC oil continues the downward slide crashing -19% to 10.35. Brent slips -3% to 19.35. USO crashes -15% down to 2.19. LOD 2.13.
Note Added Wednesday Morning, 4/29/20: Futures contracts; Jun 20 at 11.22; Jul 20 at 18.43; Aug 20 at 21.92; Sept 20 at 24.37.
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