TSP Smart: Oil Prices Go Negative

The oil market today has lessons for your investments and the markets.

I would think that the price of oil dropping to NEGATIVE forty dollars a barrel (-$40) in May Futures qualifies as interesting. It brings up the question of “what does that mean” such as:

  • Average Joe: “Does that mean I will get paid to fill up my SUV”
  • Oil ETF investor: “Does that mean I owe money”
  • High Yield Energy bond investor: “Oh $H!*”
  • Market Makers: “How do we unscrew this”

My guesses:

Average Joe: If banks get to borrow at zero or negative yields and they still charge credit card rates of 17%, don’t hold your breathe.

Oil ETF investor: I have no idea, but I bet a lot of lawyers and investors are reading the fine print on ETFs, and other oil contracts right now.

High Yield Energy investor: Go ahead and write those bonds off as defaulted.

Market Makers: Well, the Fed could buy oil stocks and oil bonds, but that is not going to stop all the storage units from overflowing.

Unlike the overall stock market where the Fed can push the price of stocks and bonds well beyond their underlying value (stream of future cash flows to investors), the Fed can not absorb billions barrels of physical oil. The negative price in theory means the producers of oil will pay you to take the oil off their hands… LOL.

In reality, what the market is telling the oil producers is “STOP PUMPING OIL” you idiots… there is NO demand.

But it is not THAT simple. Because some of those producers hedged and SOLD oil forward and so if they DELIVER, they may get paid $40 a barrel until those hedges end. So they keep delivering. It happened in 2015 which sent oil prices to the ridiculously low price of $20 a barrel… LOL… Oh if these guys could just get $20 a barrel today.

So what could the gov’t do to absorb some of this excessive supply? Fill up the strategic reserve at say -$10 a barrel. Allow hedge funds to buy old wells and reverse engineer them and get paid to pump oil back into the ground – don’t think it would not happen.

So we once again learn this is how paper markets distort physical markets in commodities and equally in the rest of the economy too when the Fed takes over price control of the price of money – interest rates.

“Worse day ever”… yeah, it probably qualifies.

This should blow up many leveraged speculative bets, sink hedge funds creating a nice cascade of defaults in the markets. So which of the five major banks made the derivative bets on the price of oil that is going to take them down (or I mean require a Fed bailout).

Boy, if only the money printers had some sort of cover to bail all their buddies out again – like a pandemic or something.

Oh, another negative story. Goldman Sachs estimate for 2nd quarter earnings is down 123%. I’ll let you think about that as the stock market lingers near its technical resistance line.

Invest safe,

Michael Bond

TSP & Vanguard Smart Investor serving serious and reluctant investors

Categories: Perspectives, The Smart Bird