Oil Crashes, Will Stocks Follow?

by Options Sensei |

Stocks will remain the overall focus but the spotlight over the past two days has been oil.  On Monday, the May contract for West Texas Crude crashed below zero, closing at a negative -$37 per barrel! The widely-followed “United States Oil Fund (USO)” which had over $7 billion in assets under management just a month ago dropped to one single dollar. Down some 90% in the past month alone.

We’ve seen negative interest rates, a perversion of the cost of money but somewhat conceptual, but what do negative prices for a hard asset mean and what are the implications for the energy sector and the broader market at large?  Oil and the futures have their own specific dynamics outside of the physical market but it gives us insight into just how bleak the outlook is for the sector.

On the supply side, new fracking technology and a fractious OPEC which had boosted production rather than cut as the Saudis and Russkies engaged in a spat created a glut. These actions were taken just as demand has collapsed due to the global shutdown. Some are speculating the Saudi and Russian action was done as means to break the U.S. oil industry which has essentially become energy independent over the past few years. The flooding of oil supply has created a situation in which there is literally no available storage space available. Leaving producers with the dilemma of shutting down production, which is extremely expensive, or paying someone to simply take the oil off their hands.

Think of the… Continue reading at StockNews.com

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