Oil prices went into negative territory in afternoon trading on Monday for the first time ever. That means that the person selling the contract would be paying the buyer to take delivery of the oil.
If the most closely watched gauge of oil prices is quite literally worthless, is it time to dump oil stocks? Probably not, particularly if you are holding stocks that can generate enough cash to meet their obligations through the end of next year. The worst of the oil meltdown will eventually be over, and the world will need oil to power the recovery from the coronavirus.
The May oil contract that went negative is the futures contract that is set to settle on Tuesday, meaning anyone who owns it will be expected to take physical delivery of 1,000 barrels of oil in May for every contract owned. In normal times, many businesses would need that much oil—airlines, gas stations and steel mills all use a lot of crude products. But today, with Covid-19 restrictions causing the global economy to stop, little oil is being used. Refineries and pipeline-operators don’t want it, and there is almost nowhere to store it.
Still, demand for oil isn’t drying up. Futures contracts that expire in later months are still trading for more than $20, and in some cases for more than $30. Covid-19 restrictions will eventually ease and businesses and consumers will be buying oil products again.
“Negative oil” bets apply to a very small slice of the market. The overwhelming majority of oil contracts outstanding today represent bets that oil will be above $20. Going into the weekend, there were only 108,000 open contracts for May futures, versus 538,000 for June and 330,0000 for July, according to the Chicago Mercantile Exchange. Most investors are betting that crude will trade at more than $20 by June and more than $30 by September. And the front-month contract for Brent crude, the international benchmark, settled on Monday at $25.57.
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Oil companies, particularly in the U.S., are in for a reckoning. None can consistently make money at prices below $40. There could be dozens of bankruptcies before the end of the year.
But companies that have managed debt well should eventually see a rebound as other producers exit the market and the supply-and-demand balance is restored.
“Today’s price move feels like oil is passing a kidney stone,” said David Winans of PGIM Fixed Income. “A very painful move but it can’t last for long, since producers are switching off wells as we speak.”
https://www.barrons.com/articles/oil-stocks-p...1587414871
If the most closely watched gauge of oil prices is quite literally worthless, is it time to dump oil stocks? Probably not, particularly if you are holding stocks that can generate enough cash to meet their obligations through the end of next year. The worst of the oil meltdown will eventually be over, and the world will need oil to power the recovery from the coronavirus.
The May oil contract that went negative is the futures contract that is set to settle on Tuesday, meaning anyone who owns it will be expected to take physical delivery of 1,000 barrels of oil in May for every contract owned. In normal times, many businesses would need that much oil—airlines, gas stations and steel mills all use a lot of crude products. But today, with Covid-19 restrictions causing the global economy to stop, little oil is being used. Refineries and pipeline-operators don’t want it, and there is almost nowhere to store it.
Still, demand for oil isn’t drying up. Futures contracts that expire in later months are still trading for more than $20, and in some cases for more than $30. Covid-19 restrictions will eventually ease and businesses and consumers will be buying oil products again.
“Negative oil” bets apply to a very small slice of the market. The overwhelming majority of oil contracts outstanding today represent bets that oil will be above $20. Going into the weekend, there were only 108,000 open contracts for May futures, versus 538,000 for June and 330,0000 for July, according to the Chicago Mercantile Exchange. Most investors are betting that crude will trade at more than $20 by June and more than $30 by September. And the front-month contract for Brent crude, the international benchmark, settled on Monday at $25.57.
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Oil companies, particularly in the U.S., are in for a reckoning. None can consistently make money at prices below $40. There could be dozens of bankruptcies before the end of the year.
But companies that have managed debt well should eventually see a rebound as other producers exit the market and the supply-and-demand balance is restored.
“Today’s price move feels like oil is passing a kidney stone,” said David Winans of PGIM Fixed Income. “A very painful move but it can’t last for long, since producers are switching off wells as we speak.”
https://www.barrons.com/articles/oil-stocks-p...1587414871
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