foxex: Storage Shock

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, April 20, 2020

1. Investors pay to get rid of their oil

2. Think your portfolio looks bad right now?

3. Stock market risk may actually be lower now

Market Moves

While stocks sold off moderately, the oil markets sold off heavily. So much so that investors are not likely to see prices like this again in their lifetime. The chart below captures the spot price of West Texas Intermediate crude oil futures (USOIL). Headlines told the tale of how oil futures contracts traded for a negative price for a few moments during the day's session. That would mean that the previous buyer of that contract would now pay someone else to take it off their hands.

The reason this happens is that the physical delivery of oil (something that is intended to take place after the futures contract expires), requires space to store it. That space isn't cheap. In fact it's so expensive that some traders were willing to pay $40 per barrel of oil, just so they wouldn't have to take delivery--and this is in addition to whatever they might have lost on the trade to begin with.

The action made for some crazy pricing that even the most experienced traders had not seen before. It is unlikely that such pricing will continue, however, because at those prices, someone will make more storage available in a hurry. The problem is that right now this is easier said than done because there is so much more oil in storage right now than energy consumers want to buy. So ultimately that means gas prices are likely heading somewhat lower in the near term. But it is doubtful that your local convenience store will pay you to take the gasoline off their hands.

Think Your Portfolio Looks Bad Right Now?
Surprisingly, the rapid drop in the price of oil didn't change the price of many oil stocks today. Which confirms the fact that Oil's price movement is an anomaly that the market expects will correct itself quickly. However stocks in one sector of the oil industry, those involved primarily in offshore drilling, didn't have to wait for today's action to make a dent in those companies' valuation. If you feel bad because your portfolio is lower in value today than it was at the start of the year, well maybe a little bit of schadenfreude will bring solace.

Consider the chart below which plots the unhappy state of a portfolio containing equal parts of four off-shore drillers: Diamond Offshore (DO), Transocean Limited (RIG), Nabors Industries (NBR) and Noble Energy (NBL). This portfolio has lost 80% of its value just since the start of the year, and it is not likely to rebound any time soon.

Alphabet Stock Could Enter Major Downtrend

India ETFs in Focus After Goldman Downgrade

SPONSORED BY INVESCO
The Complete Guide to ETFs
ETFs are becoming increasingly popular and soaring to new heights among investors. Invesco's insights can help you determine if these investment vehicles are right for you.

LEARN MORE >

Stock Market Risk May Actually Be Lower Now

With such dire news in the oil markets right now, and with large-cap stock indexes falling anywhere from one to three percent today, it would seem crazy to say things were somehow looking better for investors, and yet they actually may be. Risk measures, such as the CBOE Volatility Index (VIX) for example, are significantly lower than they have been in recent days.

An additional measure of risk is the number of stocks close to hitting their stop losses based on a given algorithm. The chart below looks at the percentage of stocks within the S&P 500 that are close to hitting a stop loss based on a proprietary algorithm used by smartstops.net. This particular algorithm and risk measure have been shown to be historically significant. The point of note is that today marked the first time since the beginning of this pandemic panic that the risk measurement moved back below its 100-day moving average. The oversimplified implication here is that though stocks might not be heading up just yet, there is less risk of them falling to a trailing stop today than there was just a week ago.

The Bottom Line

Oil prices crashed because of an oversupply in oil and shortage of places to store it. Though the stock market fell today, it didn't fall as far or as fast as it has in recent weeks, leading to some risk measures showing a more favorable environment for investors right now.