The major markets pulled back last week after two consecutive weeks of gains. Yet, the losses were minimal given the volatility seen this year. As of Friday, the Nasdaq has done the best to recover from the lows of this year. Yet, emerging markets have continued to struggle as the international position is down the most YTD.
The biggest news last week was the activity in the Crude Oil Market. For the first time in history, the price of May Crude Oil WTI futures traded negative and closed at -$37.63 last Monday. This has understandably caused many investors to ask, “How is this possible?”
This is because of the use of futures contracts. Future contracts allow market traders the ability to secure the price a good at a later date with liquidity on a daily basis in the present. Futures contracts have a date when they mature and roll over to the next monthly instrument. But last week, in the case of crude oil, the supply was so great that the market effectively had to pay a buyer to take possession of the May oil contract. In essence, the previous buyer no longer wanted to take possession of the oil because they would have to find a place to store it.
Reuters reported that demand is down over 30% worldwide. With oil consumption down, producers have had to find places to store oil until production and demand come back into balance.
The primary place in the United States for oil to be stored is in Cushing, Oklahoma. The oil hub holds a tank farm with about 76 million barrels of storage capacity, of which 53 million barrels are already being stored there. The remaining space has been largely claimed, leaving little if any room for the additional supply in the coming weeks.
As a result, the domestic oil producers have begun shutting down rigs nationwide. The Baker Hughes Oil Rig Count fell to 465 last week. This marks the lowest active rig count level since August of 2016.
The EIA reported that the peak of weekly U.S. Field production of Crude oil took place back on March 13th, after producing consistently over 13 million barrels per day in the first quarter of 2020.
On Monday, President Trump announced that he would add as much as 75 million barrels of oil to the nation’s strategic petroleum reserve. But this will take time to achieve. Some analysts estimate that the government can only add 2 million barrels per day and then they may even run out of storage capacity in a matter of months.
Oddly enough, the only positive sector last week was Energy. The 1.67% weekly gain was fueled by the immediate recovery in oil and the hopes that more will be done in the future for this segment of the economy.
Bloomberg.com, Bloomberg, www.bloomberg.com/news/articles/2020-04-20/trump-wants-to-add-75-million-barrels-to-strategic-oil-reserve.
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