Frame This Chart

Written By Christian DeHaemer

Posted April 21, 2020

Yesterday the May 2020 contract for oil fell to negative $35 at the close from $20 at the open. That is, in theory, the oil producers would have to pay you to take it.

When I first started trading there was always a secondhand story about some guy who didn’t get out of his coal/pork bellies/corn futures contract in time and when he came home there were three tons of unprocessed bacon on his lawn.

Yesterday was that day. But it wasn’t some guy from Salomon Brothers but the oil ETF USO. Here is the price action on the May 2020 contract as it expired yesterday:

This has never happened before. You should frame this chart and put it on your wall, tell your grandkids, wake the neighbors.

But hey, free oil.

I immediately hatched a plan to rent a tanker truck from this place in Houston, have my brother-in-law drive it to Cushing, Oklahoma, and fill it up for free.

Then we could park it in the backyard for a year at which point we would sell it for $35.  The March 2021 WTI Crude futures price is $34.68. A tanker truck can hold 190 barrels of oil, so that’s an easy $6,650.

But then the monthly rental on a tanker truck is $5,000 and the OSHA fines could get expensive. Plus the wife was against it, fretting about the petunias and what have you.

Brent Crude is at $21.48 a barrel

Oil, of course, really didn’t fall to negative numbers. It’s all an aspect of these inefficient sector ETFs, in this case, the oil ETF United States Oil (USO).  Because USO buys a constantly rotating series of futures contracts in order to “reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma” it got stuck holding bad paper during a long squeeze. 

An ETF can’t take physical control of the oil. It owns zero storage capacity at Cushing. So, it had to dump all its paper even if that meant taking a massive loss.  

The USO is also long 160 million barrels of June contracts, so it will be fun to watch this play out. No one really knows how or if they will meet their margin calls.

Swimming in Oil

What this does tell us is that there is too much oil in the world. Usually the world consumes around 100 million barrels a day. With the COVID-19 virus, no one is driving and industrial plants are shut down. We are now consuming much less, an estimated 70 to 75 million barrels a day.

This leaves 25 million barrels a day that need to be stored someplace on land in tankers, at sea in ships, or even in railcars. But storage is quickly running out with expectations it will be full in a month.

Oil producers are already cutting back drastically. Oil rigs in use have dropped to half their number of what they were at the peak. The oil patches in Texas, Oklahoma, and North Dakota will be hit hard. Last year the oil industry was 8% of U.S. GDP. A shutdown will cause a lot of pain that will ripple across the entire market. These are six-figure jobs.

The fact that the Dow wasn’t down 2,000 points yesterday means it is no longer a market and more of an experiment in price-fixing by the Federal Reserve. In my monthly stock advisory, Christian DeHaemer’s Bull and Bust Report, we went long on floating oil storage stocks two weeks ago. These plays are up more than 40% and rising fast. Join us today and make money from this once-in-a-lifetime event.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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