If you weren’t paying attention to crude oil today, you must be living under a rock. The action was nothing short of spectacular as the May futures contract traded at -$40 per barrel. Yes, NEGATIVE $40 per barrel.
That means people were literally paying others to take possession of their crude oil. Bloomberg has a decent, short write up explaining it. There’s an even cooler real-time explanation here.
Here’s the thing… the average, retail trader doesn’t fully grasp what’s going on. The same, poor schmucks in my FB real estate investor group that were advocating buying Carnival and Wynn stock were also figuring out the best way to get long crude oil. They must have thought today was a godsend for their delusions of future riches.
What a bargain they must have thought they were getting as they bought up as much USO as they could muster after now likely being down a hefty margin. But hey, just keep cost averaging, amirite?!
Adam Button does a fantastic job summarizing the pickle retail folks will be in.
One of my favorite lines of the short article (referencing the $USO ETF here):
It’s an instrument used by retail traders to bet on one-day moves in oil. It’s very likely that tourists in the oil market thought they were buying crude at $1 today or at negative prices in the May contract. In reality, they were buying an 80/20 split in the June/July contracts trading at $22/$27 respectively. These can fall much further.
I almost feel sorry for them.
So while the average investor is thinking about what a bargain they’re getting buying crude at $22 while thinking they’re buying it at $0, the more savvy folks are thinking about what a complete collapse in the world’s largest commodity means for the broader market.
I’m not smart enough to know what implications this move in crude oil will have on the stock market or broader economy. But I know it can’t be good. The fact is, the recent rip higher in stocks hasn’t been convincing to me, and smarter folks are finding the data to back up my spidy sense.
One thing I do feel I am certain of… interest rates are going lower, likely to zero and beyond. Here’s a gorgeously clean chart of the US 5-year treasury bond yield:
Notice that bounce that’s coincided with the face ripping rally in equities?
No?
Yeah, me neither.
This is as good as it gets from a technical analysis perspective. You literally see patterns like this in textbooks, but rarely in the wild. The 2-year, 10-year, 30-year… they all look the same, but with more extended lows during the initial dump.
The chance rates move lower from here is very high. What drives it? Demand for US Dollars. What drives that? Search for yield from other countries that already have negative interest rates and a flight to safety if/when shits hits the fan (again).
What do you mean again?! I thought stocks were rallying and all this COVID stuff will be behind us. THE ECONOMY IS OPENING BACK UP… TRUMP PROMISED!
lol. That’s what crude said today… L.O.L.
So what do you do? First, don’t be a sucker. Don’t try to trade crude when you don’t even understand that the ETF you’re buying isn’t trading the contract that’s shitting the bed on CNBC. Know what you own.
Second, don’t panic. It’s better to do nothing than something.
When I saw crude dumping today it felt like a big red flag. I shorted the S&P 500. I’m probably too early.
I moved our 401k’s to 100% bonds on April 9th. That was definitely too early. I knew it would be. But I’d rather be early than late. If you’re going to panic, make sure you’re the first to do so.
Finally, as if this year can’t get crazier, Kim Jong Un is reportedly very ill. At one point it was reported that he was “brain dead”, but that’s now being walked back.
These are truly fascinating times.