What to Buy When Oil Prices Go Negative?

NYSE: USO | United States Oil Fund News, Ratings, and Charts

USO – We’ve been handed a rare gift. There is a good short-term investment right now in oil stocks like: USO.

Get Free Updates

Join thousands of investors who get the latest news, insights and top rated picks from StockNews.com!

There’s Such Much Oil, They’re Giving It Away

The big financial news lately hasn’t been coming from the stock market, but from the oil pits. With most people staying close to home, the global demand for oil has plunged, and its price has dropped through the floor.

Actually, not just through the floor, but several inches into the ground. Allow me to explain.

Supply and demand are out of whack, and there’s a large supply of oil that needs to be stored…but no place to put it. No one wants to own it—and I mean no one! On Monday, the price for the May futures contract for West Texas Intermediate actually went negative.

That’s not a typo. They were paying people to take oil. The lowest price I saw was minus $37.63 per barrel.

As the old joke goes: “that’s not a bad price for a barrel.”

What’s Happening?

The whole oil market has been wrecked. If the Beverly Hillbillies were remade today, Jed Clampett and his kin might not have much reason to leave home.

I have to point out that we’re talking about the May futures contract. Later months don’t look so dire, when the over-supply shouldn’t be as much of problem. But right now, it’s a big honking deal.

How did we get here? Well, obviously the novel coronavirus was the main mover. Reuters notes: “The Russian energy ministry has told domestic oil producers to reduce oil output by around 20% from their average February levels.”

My response: HAHAHAHAHAHAHA

**wiping tear**

First of all, these countries rarely keep to their production targets. And while Russia isn’t a member of OPEC, it’s worth noting that members of that cartel almost always cheat.

The problem isn’t supply; it’s all about demand. No one is driving and most everything is shut down. Even the highways of Southern California are fairly clear; that hasn’t been seen in decades.

To Understand Oil, Let’s Look at Toilet Paper

What’s happening to oil is actually similar to what’s happening to toilet paper. Say what?

Give me a moment to explain. Once the coronavirus began to spread, we quickly saw a shortage of toilet paper. The question was: why? While there certainly was some hoarding, that wasn’t the cause of the shortage.

To put it in economic terms: the demand for toilet paper didn’t change. The difference is that folks weren’t using it at the office or at restaurants. The market for “residential” toilet paper and “commercial” toilet paper are completely different. They’re not even made at the same mills.

The supply chains for the American economy are managed at a hyper-efficient level. If the local Walmart says to be at its loading zone at 6:17 a.m., well, you’d better not be there a minute late. In the toilet paper market, once the demand for the commercial version of the product dropped off, the surge in residential use overran the system. The shelves quickly emptied.

That’s what happened with oil. The supply and demand variables are constantly worked to be in careful balance. The coronavirus made the whole darn equation go kablooey.

What to Do Now?

We’ve been handed a rare gift. Oil is a good short-term investment right now. But let me be clear that I’m talking about a very short-term move.

 

United States Oil Fund LP (NYSEARCA: USO)

The main Oil ETF (USO) invests in oil via futures contracts. Their contracts have already been rolled over, so USO wasn’t crushed like the rest of the oil market. Interestingly, we didn’t see major energy stocks get smacked around, either…but to be fair, those stocks had already taken it on the chin.

Contracts for the future months for oil will see much more conventional prices. We’re seeing some political grumblings to reopen the economy, not just in the U.S. but in other countries, which may help spark further demand for oil. Or at least, it could ease some of the burden of the plunge.

Shares of USO look good here, but I would be quick to exit the position after a 20% gain from your entry point. Get in, get out, and move on.

Want more great investing ideas?

Have you spotted the “5G” signal on your phone yet?

[NEW REPORT] Absolute 10 Best Growth Stocks to Own for the Recovery in 2020

 


USO shares fell $0.01 (-0.40%) in after-hours trading Wednesday. Year-to-date, USO has declined -80.41%, versus a -12.78% rise in the benchmark S&P 500 index during the same period.


About the Author: EddyElfenbein


Eddy is the editor of Growth Stock Advisor, an investment advisory that focuses on the top growth opportunities for investors. Each issue dissects the best areas that profit from a rapidly-changing business climate. Growth Stock Advisor takes a particular focus on emergent technologies and industries that are disrupting established incumbents. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
USOGet RatingGet RatingGet Rating
Get RatingGet RatingGet Rating
XOPGet RatingGet RatingGet Rating

Get Free Updates

Join thousands of investors who get the latest news, insights and top rated picks from StockNews.com!


Most Popular Stories on StockNews.com


:  |  News, Ratings, and Charts

Stock Market Outlook: Before & After the Election

Now is the right time to give a fresh update on my stock market outlook (SPY). That is because there is an important shift in my view of market dynamics that will result in a revised trading plan. I will spell it out as clearly as possible in the weekly commentary that follows.

:  |  News, Ratings, and Charts

Buy the Dips in These 3 Tech ETFs

The tech industry has dropped by around 15% in September. However, the sector's long-term fundamentals such as earnings growth remain solid. ETFs such as Vanguard Information Tech ETF (VGT), iShares Expanded Tech Software Sector ETF (IGV), and First Trust ISE Cloud computing Index Fund (SKYY) will outperform in the coming months.

:  |  News, Ratings, and Charts

Trading Plan to Closeout 2020

Why is the outlook for stocks (SPY) looking so bad into the election? And conversely why should stocks leap higher after the election is finalized? The answer to that and more awaits you in Steve Reitmeister’s most up to date market outlook and trading plan.

:  |  News, Ratings, and Charts

3 TOP Stocks for Long-Term GROWTH

While the market soared for five months, stocks in the tech sector were in the driver's seat. As the economy gradually recovers, it might be a good idea to consider growth stocks outside the tech sector. Here are three that might be a fit for your portfolio: Lennar (LEN), Masco (MAS), and AAON (AAON).

:  |  News, Ratings, and Charts

Trading Plan to Closeout 2020

Why is the outlook for stocks (SPY) looking so bad into the election? And conversely why should stocks leap higher after the election is finalized? The answer to that and more awaits you in Steve Reitmeister’s most up to date market outlook and trading plan.

Read More Stories

More United States Oil Fund (USO) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All USO News