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What happened to oil yesterday was the greatest collapse I've seen in any commodity, ever.
And barring some unforeseen apocalypse, we'll never see it again.
This just doesn't happen in the commodities market. Every once in a while in a stock, sure, you'll get a case of fraud or someone goes bankrupt. The stock will go to $0 over time.
In the commodities world, there's a bottom for prices. This doesn't happen. Until it did.
Oil futures traded at a negative price for the first time in history.
We had the perfect storm for an oil collapse.
Demand is down. No one is traveling, and global manufacturing has plummeted.
There's a price war. Saudi Arabia drove production way up, and Russia joined them. Now there are estimates of up to 30 million barrels a day of extra oil being produced. Even with a production cut, there will be 20 million barrels a day being produced with nowhere to go.
All that oil needs to be stored somewhere, and the world is running out of places to put it.
Futures contracts are tied to physical delivery of a commodity. Everyone dumped them because they have nowhere to put that oil.
No one wants oil right now.
And that's why this oil story is so troubling - it's very much a demand story, not an oversupply story...
What to Do When No One Wants Oil
An oil trading firm in Singapore, Hin Leong, kicked off oil's trouble. Hin Leong buys and sells large super tankers filled with physical oil to distribute through Asia.
Sunday night, it told the world it had a non-disclosed $800 million loss from trading oil. To cover the loss, it had to liquidate oil futures - a fire sale. It had to sell...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Everyone else saw that someone was in trouble and backed away from buying the contracts, betting they could wait for a lower and lower price. They saw someone "in trouble" - someone who had to ditch their contracts - because they expire today.
May futures were trading around $14 at 6 a.m. Monday. Around 2 p.m., the price fell to just pennies. Within an hour after that, nearly -$40. Negative. For the first time ever in the history of oil futures trading, since it started in 1983.
A 300%-plus drop in oil in one day.
Now, something interesting happened with stocks here...
No one paid attention to stocks yesterday. The Dow fell 2.44%, or 592 points, to 23,650.44. While the oil market was collapsing, stocks didn't lose nearly as much as they have on some days lately.
The market optimism is understandable. As New York's COVID-19 infection rate and new deaths from the virus keep dropping and countries overseas start to slowly wind down their lockdowns, traders start feeling optimistic. No one wants to miss out on the recovery rally fueled by the unprecedented trillions in stimulus.
But this risks putting the cart before the horse, as we saw this weekend. Because even as the virus-related news gets better, we're starting to get more information about how badly damaged the economy is.
It's a classic Reality Gap...
Oil is telling us one thing about what's going on in the global economy, and stocks are doing another thing.
Oil is flashing a signal that the global economy is in worse shape than it seems. Oil is saying that demand is even weaker than is priced into the stock market right now.
But as we get more and more data on how the economy is actually doing, this gap will narrow. And we'll see what kind of recovery we'll be looking at down the road.
Right now, the prognoses are all over the board: from a deep, multi-year recession (and even some thoughts of depression thrown into the mix) to a V-shaped recovery bringing us to all-time highs in months, to everything in between.
So far, there's not enough data to tell. But the market's optimism that we're already in a V-shaped upswing is premature - and oil prices are screaming that to us loud and clear.
The Oil Play to Make
So what do you do when the world is awash in oil?
With so much oil everywhere right now, it's not quite time to buy. I see oil prices staying depressed for a while.
I don't think there's much Saudi Arabia and Russia can do to help.
But there is a long-term play. Oil can't stay down this low forever; it's too far below the cost of production. Even if it takes a while to climb back up significantly, it's such an integral part of our global economy, so it will be a long-term buy and hold at some point, although we might not be at the bottom. Keep ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO) on your watch list.
Earnings seasons is starting in earnest, with some giants like IBM Common Stock (NYSE: IBM) and Coca-Cola Co. (NYSE: KO) reporting this week. Last week's bank reports were worse than expected. And remember, this earnings season covers January through March, and the pandemic only really hit the economy in March.
How traders and analysts interpret the numbers this week will be key. Another string of bad but not horrible news might be enough to keep markets going up a bit longer.
And don't forget to stay tuned for my upcoming presentation...
You see, I'm not waiting for life to return to normal, and neither should you. I'm going to give you the competitive advantage you need right now that can help you make 100% every nine trading days (on average).
That may seem like just another wild, outrageous claim. But it's not. This is EXACTLY the kind of money I've been producing for months now. You want in? Be sure to keep an eye out for more information on what's coming...
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.