The price of crude oil went negative for the first time ever. People are literally paying for someone to take their oil.
Futures traders couldn’t take delivery of the oil. There’s nowhere to store it.
The global coronavirus lockdown decimated oil demand.
Thousands of flights are grounded. People are staying home. And now there’s so much extra oil supply in the U.S. that storage options are full.
The price collapse is creating an opportunity not seen since 2009.
That’s when crude oil prices climbed 35%.
This time around, the return could be much, much greater for patient investors.
Below is a chart of oil futures prices:
A Historic Oil Price Collapse Will Bring Historic Opportunities
The black line is the June 2020 futures contract. This is what’s called the “first month,” because it is the latest contract coming due.
The blue line is the January 2021 futures contract or the seventh month.
The red line is the difference.
We haven’t seen this large of a difference between the first and seventh month since 2009.
The futures market is where speculative traders meet real businesses. Speculators are looking to make an easy buck betting on which direction the price will move. While businesses, like oil producers, are looking to lock in prices months ahead of actual production.
There are various expiration dates to accommodate short- and long-term needs.
Prices being higher for a contract six months down the road suggests that traders believe the price is going to be higher in the future.
This does not mark a bottom for prices. But it tells us one is coming.
This Time Is Different
It’s tempting to want to jump into this market now.
No doubt, this collapse will provide historic opportunities for some investors.
In the meantime, however, it means the demise of other investors. On Monday, my colleague Matt Badiali wrote about bankruptcies galore in the oil patch.
For oil prices to begin rising, investors need to believe that:
- Production will drop. This will happen because producers can’t make money at such low prices. Some will stop drilling. Some will go bankrupt.
- Consumption will increase. This will depend a lot on the timeline to open the world back up — and get the economy back on track.
- Surplus is on the decline. Declining stockpiles will be the first signal for investors that the situation is improving.
It takes time for these factors to turn.
But the severity of the price collapse is going to speed up that process. And the market is going to try to get ahead of it.
After bottoming in early 2009, oil rallied 35% during the remainder of the year despite a weak economy.
When the time comes, we can make a bunch of money in the oil market.
Energy stocks will have an amazing ride when the market perks back up.
These stocks have performed better than the oil prices in recent days. That tells me investors are looking for bargains already.
But I believe the broad stock market is due for a new decline. That’s going to add pressure to energy stocks.
When the time comes, the Energy Select Sector SPDR Fund (NYSE: XLE) is an exchange-traded fund that offers diversified exposure across the most established stocks in the energy sector. Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) make up nearly half of XLE’s holdings.
XLE bottomed with oil in 2009 and rose more than 110% in the following two years.
Be patient but be ready.
We’ll let you know when it’s time to get back into the oil market. So, stay tuned for updates in Winning Investor Daily.
Good investing,
Editor, Apex Profit Alert
