There is HUGE temptation to “jump into” oil, as it makes news headlines with negative prices. Don’t! The situation is about to get worse!
Oil last week hit a record low price of negative $37.63/bbl. If you had storage, someone would have paid you to take the oil! This is how distorted the economic markets have become!
The cause of course is speculators trading the oil futures contracts. With a futures contract, you put down a premium to buy oil at say $20/bbl in 90 days. The owner of that contract WILL take delivery of the oil in 90 days. A speculator however has no intention of taking delivery, and instead will sell the contract prior to expiration. They are hoping/speculating that oil will increase in price from $20/bbl to perhaps say $25/bbl in that 90 days, and could sell the contract for $24.50/bbl, pocketing $4.5 for each barrel. If the premium they put down on the contract was only $4.5, then they would make 100% profit on their investment.
The speculators (i.e. hedge funds, and banks like Capital One) got caught though! During that 90 days, the coronavirus killed off all demand for oil, at the same time the Saudis decided to flood the market with oil. There is so much oil out there now, there is no storage to put it!
The speculators had no bidders for their contracts! In order to get rid of the contracts expiring in May, they actually had to PAY other parties to take them! A day later, the June contracts were then quoted in the news, and are trading at roughly $17/bbl today.
Since there is still no storage, speculators in the June contracts will also find few or no bids as the June expiration approaches. To get a sense of just how large the glut is, look at this recent photo of tankers sitting off the coast of California, with nowhere to go:
This video also shows the same scene:
The glut is likely to persist for quite some time, and over the next 12 months, thousands of oil companies in the United States will go bankrupt. There is already 50 million barrels heading our way from the middle east which will increase the glut even further.
As a side note, the Trump administration this month sent a fleet of warships towards Venezuela to “stop illegal drugs”. https://www.bbc.com/news/world-latin-america-52133500
I would seriously doubt the “illegal drug” reasons mentioned, and would instead suggest the United States intends to invade Venezuela. This would solve two problems. First, we would have a large supply of cheap oil providing less dependency on the Saudis. Second, we would end the communist Maduro government taking hold in that region.
An invasion of Venezuela would provide our oil giants opportunities to remain in business for years to come!
Regardless, low oil prices are here to stay for the foreseeable future. Unless you intend to consume oil, I would suggest staying clear until the market re-balances. The “bottom” in prices is still a negative number as we will learn again when the June contracts expire!