Yesterday was crazy.
I woke up to an inbox full of subject lines like “are you watching this?” and “oil is just collapsing”.
Now, we’ve written before about how oil demand has absolutely cratered so, when I fired up my Bloomberg Terminal, I wasn’t entirely surprised to see it approaching single digits.
But nothing prepared me for what was about to happen over the course of the day.
Prices just kept going down. Forgive the quality of the pictures you’re about to see, but this all happened so fast, I couldn’t even get screengrabs.
First, West Texas Intermediate (WTI) oil prices set new all-time lows in the mid-$5 per barrel range.
Then they went to $1 per barrel…
Then they went to a penny…
Then they went negative…
And by the time the dust had settled, the May contract for West Texas Intermediate crude oil had touched -$40.32 per barrel before finally settling at -$37.65/bbl.
All this happened in the span of about two hours.
I’ve been an energy market analyst for 15 years now, and honestly, I’ve never seen anything like it.
But my phone was ringing off the hook yesterday, so in order to service my research clients, I had to figure out what to think about all this in real time.
Here’s what I told them…
Oil prices are telling us right now that the world is awash in crude, and we’re running out of places to put it.
But it’s here in the US where the issue really lies. Current storage levels (marked by the red circle in the chart below) are sitting at a little over 500 million barrels – just 200 million barrels or so below our max capacity.
Source: EIA, Bloomberg
And while we’re not yet at all-time highs, the current lack of demand means we are filling it up at a breakneck pace.
Just last week, the US added 19.25 million barrels into storage, which implies on paper that oil producers have about 10 weeks left to solve their overproduction issues.
The only problem is that storage is organized regionally, and our ability to transport crude from region to region is limited.
And worse, Cushing, Oklahoma (where WTI crude is priced) is projected to run out of storage much sooner than that.
When that happens, producers will be forced to rely on shippers and traders to take physical ownership of all that crude – which is one of the reasons we bought oil tanker company DHT holdings (NYSE: DHT) back at the beginning of the month.
What that means is that producers will have to pay for someone else to store their oil…
And that in turn makes oil prices negative.
So that’s what happened yesterday as the May contract expired. And it’s going to happen again in the June contract unless producers begin shutting in wells very soon.
But honestly, we haven’t yet seen another meaningful adjustment in share prices of any of these oil producers yet.
That’s unlikely to last.
The easiest way to get leveraged exposure to the next downturn in oil production is through Direxion’s Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (NYSEArca: DRIP).
Prices are beginning to improve, so let’s divide our entry into three parts.
Establish 1/3 of any intended stake now, and set a limit order to pick up the next 1/3 at $10.77 per share. Hold the remainder in cash until further instructions.
The downward move in oil prices has also transferred over to other commodities, and gold actually pulled back to a level that looks attractive.
So while we’re at it, let’s go ahead and establish another ¼ stake in Velocityshares 3x Long Gold ETN (NASDAQ: UGLD) here too.
That’s it for now, but check back frequently… these markets appear poised for a pullback, and we’ll be ready to pounce.
All the best,