Free oil for life!
On Tuesday, the price of a barrel of oil fell to -$37! If you did a double take, yes there is a negative sign in front of the $37. You would actually be paid $37 to take delivery of the May contract for oil! Imagine if the gas station would pay you to fill your tank. At first glance this looks like the investment opportunity of a lifetime. If you could buy oil and store it for a month or two, then sell it when things normalize, you could maybe double or triple your money.
I did look closely into how I could profit from the opportunity. The difficulty is that there was nothing that I could buy that didn’t come without a great deal of risk. The oil ETF (USO) which is the largest and most liquid oil ETF was trading at a 35% premium! This premium signifies that the investments held inside of the ETF were valued at 35% higher than what they were worth. I would lose -35% if the NAV of the ETF went back to what the contracts were actually worth. This is exactly what happened over the next few trading days. The only way to profit is if I could buy oil and take delivery of it. Unfortunately, buying an oil tanker was never in my business plans, but it would have been the easiest money that you could ever make. Even if you owned an oil tanker it was already full of oil because the world is flooding in it.
This didn’t stop other people from trying to buy this oil ETF. Another advisor shared a story with me about one of their clients that called them and demanded to buy the oil ETF. The advisor told the client not to buy, but the client persisted because all his friends were buying. This client had the advisor allocate 25% of his account into it. The advisor followed the clients wishes and that oil ETF immediately went down around -40% from the time they bought. The good news for the client was the ETF was down as much as -65%. The advisor joked with me that his clients wife will probably not be at the next annual investment meeting.
The inexperienced investors who rushed in first probably lost more this week than they ever did trading pot stocks and crypto currencies. I’m sure there is someone out there that hit the trifecta of losing -65% in oil, pot, and crypto.
Many of the new online trading companies monitor what other investors are buying on the platform. On the Robinhood app, 100,000 investor accounts opened positions in the oil ETF and it moved into the top 30 before the -65% crash. Now 196,034 accounts own this position. The lower the price goes, the more Robinhood accounts will open a position. To put this into perspective, Apple is held in 348,820 accounts. Another firm Interactive Brokers had to write down -$88 million in losses because they couldn’t collect the margin calls from their clients accounts fast enough. Not only did inexperienced investors buy this ETF, they did it with borrowed money. This was one of the reasons why the price of oil fell as fast as it did. It was due to all the margin calls. I’m sure there were some tough dinner conversations this week about brokerage accounts blowing up.
The actual price of oil is really closer to $26 a barrel and not the $17 that you see quoted in the news. The contract price for oil delivered for September 2020 is at $26. If you believe oil is going to be higher than $26 in September, then you can buy all the contracts you want. It seems like a good bet, but so did oil for delivery back back in January 2020 for the May 2020 contract and that fell from $40 to -$37. With this trade, you will either be spectacularly right or spectacularly wrong. This is the perfect investment for someone who wants to gamble.
The most careless retail investors are back in this market. They don’t care about fundamentals or economics. Many also don’t even research the symbol before they buy. More than a few retail investors bought Zoom Technologies (Zoom), instead of the correct company Zoom Video Communications (ticker symbol: ZM). ZM is the video conferencing company that has benefited the most from the new abnormal stay at home economy. But it was ZOOM stock that increased 700% in a month before the SEC stopped trading in it. These investors were buying the wrong stock and the dumbest ones who made the mistake first profited 700%!
You have to wonder where they get all of their money to continue to speculate. I’m sure many stimulus checks got lost in the oil ETF. The good news is that over the last few weeks markets have stabilized and trading volume is dropping. This means that most of the short-term selling pressure is over for now. It also could mean many larger institutions don’t want to buy at these high prices. But markets tend to rise on low volume and fall on heavy volume. I’ll continue to monitor this trend. I’ll also look into buying an oil tanker. 🙂
