Oil Crashes, Will Stocks Follow?

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

USO – Today’s featured article covers the USO, and examines oil’s recent crash, analyzing whether stocks will follow suit. Read on for all the details.

Stocks will remain the overall focus but the spotlight over the past two days has been oil.  On Monday, the May contract for West Texas Crude crashed below zero, closing at a negative -$37 per barrel! The widely-followed “United States Oil Fund (USO)” which had over $7 billion in assets under management just a month ago dropped to one single dollar. Down some 90% in the past month alone. 

We’ve seen negative interest rates, a perversion of the cost of money but somewhat conceptual, but what do negative prices for a hard asset mean and what are the implications for the energy sector and the broader market at large?  Oil and the futures have their own specific dynamics outside of the physical market but it gives us insight into just how bleak the outlook is for the sector. 

On the supply side, new fracking technology and a fractious OPEC which had boosted production rather than cut as the Saudis and Russkies engaged in a spat created a glut. These actions were taken just as demand has collapsed due to the global shutdown. Some are speculating the Saudi and Russian action was done as means to break the U.S. oil industry which has essentially become energy independent over the past few years. The flooding of oil supply has created a situation in which there is literally no available storage space available. Leaving producers with the dilemma of shutting down production, which is extremely expensive, or paying someone to simply take the oil off their hands. 

Think of the negative oil prices as someone running an ad on Craigslist offering to pay someone to come and remove an old couch from their house. Oil has been somewhat disconnected from the general stock market for some years as tech stocks have usurped energy as the largest most profitable companies. But the base of the economy still runs and needs fossil fuel and this collapse in price can only be viewed through a negative lens in terms of global growth over the near term. 

From a financial standpoint the prospect of bankruptcies and defaults, the energy sector represents nearly 40% of the high yield debt market, which could cause ripple effects throughout the equity and bond market. That said, this honey badger of a stock market doesn’t care much beyond the fact the Fed said it will do everything in its power to prevent stocks from going down. 

That is probably the single biggest factor as to how stocks have staged this mind-boggling rally over the past two weeks even as the fundamental news flow has deteriorated, or at best, not improved. It sounds stupid and simple but history has shown you truly DO NOT FIGHT THE FED.  In the past, it was mostly a matter of interest rates. This time they explicitly stated they will print money with the specific purpose of buying assets directly. Also, stocks are forward-looking and right now there seems to be the potential for more positive catalysts than negative. You can only shut the economy down once, and that has happened; it’s only the duration that creates uncertainty. 

On the other hand, two main positive catalysts include promising developments on the health front in term of possible treatment, (and I do think science will catch up and find solutions before there is a possible ‘second wave bending of the curve), more testing and the plan for re-opening businesses which can happen relatively quickly if it don with safety (rather than what is ‘essential’) as a priority.  

They say in the short term the stock market is a voting machine while in the long term it is a weighing machine; meaning right now fundamentals don’t matter.  The question can the Fed’s actions, as popular as they are, become a permanent finger on the scale if the underlying demand remains incredibly light and businesses continue to cut to the bone?

Want More Great Investing Ideas?

9 “BUY THE DIP” Growth Stocks for 2020

7 “Safe-Haven” Dividend Stocks for Turbulent Times

Investors Beware: It’s Still Really Bad Out There!

USO shares were trading at $2.40 per share on Tuesday afternoon, down $1.35 (-36.00%). Year-to-date, USO has declined -81.26%, versus a -14.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
USOGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com

Bullish or Bearish Stock Set Up?

The S&P 500 (SPY) record highs sounds pretty darn bullish on the surface. Yet as we dig below the surface there are some curious signals that point more Risk Off. This is especially true as we come into the next Fed meeting after a round of data that points to inflation still being too high...only further delaying the first rate cut. What does this all mean for stocks from here? Steve Reitmeister offers his latest views on the market outlook along with a preview of his top picks to stay on step ahead of the market. Read on for more...

Unveiling Adobe (ADBE) Q2 Earnings: What Lies Ahead for Investors?

Software giant Adobe Inc. (ADBE) has released its second-quarter earnings, revealing double-digit growth in both revenue and profits. Yet, concerns arise around the complexities of navigating growth in the face of advancing AI technologies. Let’s analyze ADBE’s recent performance and assess key fundamentals to uncover what lies ahead for investors…

3 AI Stocks to Invest in for the Next Technological Revolution

The AI market is experiencing a significant growth trajectory, driven by widespread application across various industries. Hence, it could be wise to invest in top AI stocks, Alphabet (GOOGL), Meta Platforms (META), and Alibaba Group Holding (BABA) for the next technological revolution. Read more...

Analyzing Broadcom’s (AVGO) Q2 Earnings: Worth Investing?

Driven by a surge in demand for its AI products, Broadcom (AVGO) reported robust earnings in its latest quarterly results, exceeding expectations on both top and bottom lines. However, is the stock’s recent announcement of a 10-for-1 stock split worth investing in? Keep reading to find out…

Stock Alert: Breakout or Fake Out?

The S&P 500 (SPY) officially made new highs this week. Perhaps a reason to celebrate more gains on the way...or perhaps there are signs this move is hollow leading to more downside soon on the way. To help solve this riddle, 44 year investment veteran Steve Reitmeister shares his views along with a trading plan and top picks to stay on the right side of the action. That is what Steve Reitmeister will cover in his latest commentary below. Read on for more...

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