Worst day in oil history, more money to god of money

21. Apr. 2020

Perhaps the main news yesterday was the fall of WTI crude oil to its lowest level in history. Anyway, yesterday will go down in history as the worst day in the history of the oil market: losing 300% (!) of price per day is definitely an achievement.

But you need to understand what kind of oil that has lost 3 times of its value. We are talking about the May futures. In many ways, what happened yesterday in the oil market was a technical issue. The expiration date for the May futures contracts on the WTI brand was on April 20. Since there is no demand here and now for physical oil (pandemic, lockdown and economic crisis), and the storages are full, none of the owners of futures contracts wanted to execute them. Roughly speaking, nobody now needs a physical supply of oil, because here and now there is nothing to do with real oil. Accordingly, buyers began to get rid of contracts. The fact that there are a lot of them, and they began to do it at the very last moment provoked a fall almost to the area - $ 40 per barrel.

As a result, the price difference between the May and near contracts reached completely indecent and historically record highs. In general, now those who have the opportunity to store oil can get rich. Judging by the current difference, the cost of storing a barrel of oil reaches $ 40 for a couple of months. So those who have a couple of empty tanks in reserve could well buy May futures for $ 40 yesterday and sell June or July futures at the same time.

Futures of longer periods suffered yesterday too, but far from critical losses (just look at the prices for June or July futures to understand that nothing was lost and the world is still here). Reason: everyone understands that there is a current moment with its momentary characteristics, and there is a prospect for the development of events. So, the prospect is such that in the very foreseeable future, demand will mostly recover, and the storage facilities will accordingly begin to be actively emptied.

It is this fact that supports us in the belief that oil purchases from current prices or higher are not a problem position. The shock associated with the epidemic is limited in time: all that buyers need is patience. Some positions just need to be sustained. This is definitely the case.

In the USA, meanwhile, they continue to make more and more money as a sacrifice to the God of Money. We are talking about a package of measures to help small businesses in the amount of $ 500 billion. It is expected that legislative procedures will be successfully passed by the end of the week.

In the US stock market this week, the focus is on the earnings season. Banks last week seriously failed, losing some 50% and some almost 90% of profits. This week 74 out of 500 companies from the SP500 index report, so it will be very hot. And when energy companies or airlines will report, the return to the reality of bulls can be very tough.

On average, analysts expect earnings in the second quarter to fall by 26.7% (5.7% growth was forecast before the epidemic). This will be the biggest decline since the first quarter of 2009, when earnings fell 41.1%, according to FactSet.

Recall, we strongly recommend selling on the US stock market, which we consider absolutely divorced from reality.

Lets quote Scott Maynerd, investment director at Guggenheim Investments ($ 270 billion under management): “Speaking about current P / E levels, the stock market has no intrinsic value. The growth of stock indices is due solely to liquidity”.