The Negative Pricing of May Crude Oil Futures Is Worth Analyzing

The price of oil plunged to a negative number yesterday, and that requires more explanation than it’s receiving in the general media.

It is the price of a particular oil futures contract that fell as low as negative $37.11 on Monday, not the price of a barrel of oil. The futures markets can be complicated and confusing, and yesterday is an example. 

The futures contract for West Texas Intermediate Crude to be delivered in May was the focus of attention. Monday was the last day of trading for that contract.

The contract for delivery in June was around $20 yesterday and is around $15 today. The contract for Brent Crude is around $20 per barrel.

The point is that futures contract prices aren’t the same as the price of the actual commodity. The price of oil isn’t near what was represented by the price of the May futures contract yesterday.

Even so, yesterday’s price move was unprecedented and has some fundamental factors behind it. Oil prices, in particular, and commodities prices, in general, are in a deflationary mode.

Oil faces two big shocks. The economic shutdown precipitated by the coronavirus pandemic greatly reduced demand. On top of that, Saudi Arabia chose this time to engage in an oil price war with Russia and Iran. All the countries continued to supply oil to the market though demand was declining.

Only recently did the countries agree to reduce the amount of oil they’re supplying to the markets, but it was too late to keep the futures price from falling off a cliff.

Reports indicate that pipelines, storage tanks and tankers are filled with oil virtually no one wants to buy. Apparently, there is no place left to store any additional oil. 

So, while no one is selling physical oil for a negative price at this point, there is a glut of oil on the market that is going to continue.

Don’t think you’re going to make a lot of money from an oil-related investment today. Many people apparently don’t realize that, because trading in the ETF Barclays iPath Series B S&P GSCI Crude Oil (OIL) has soared. The exchange-traded fund (ETF) buys near-term futures contracts, not actual oil. It has felt the worst of this downturn and will continue to do so.

If you want to try to profit from the oil situation, I suggest purchasing a services company that provides the pipelines and storage facilities, such as Enterprise Products Partners (EPD) or a mutual fund that invests broadly in the sector, such as Cohen & Steers MLP & Energy Opportunity (MLOAX). The latter fund has several classes of shares. Check with your broker to determine which is the best share class for you. Both investments have been rising while oil’s price has been plummeting.

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