How an Abundance of Oil Is Affecting the Markets
Editor’s Note: Tomorrow’s a market holiday – so that means two things.
- You get a long weekend break from trading the stock market.
- There won’t be a Trade of the Day issue on Friday.
Have a great weekend – we’ll talk to you on Monday!
– Jason Roberts, Senior Managing Editor
Oil has been in the news in a big way…
The market was oversupplied with oil going into this market crash, and now there is an abundant supply like we have never seen before. The U.S. produces 15 million barrels per day (bpd). It consumes 19 million in a booming economy. The consumption number is probably close to 10 or 12 million today.
Think about it…
Airlines have cut capacity by up to 80%. The air over Los Angeles is cleaner, and the smog is gone as drivers are staying put, aside from trucker drivers who are considered essential.
More oil is being produced than needed domestically, but various grades of oil still need to be imported for our refineries from countries like Canada, Mexico and Saudi Arabia.
To add to the overabundance of oil, Russia and Saudi Arabia increased production by about 5 million bpd.
The U.S. is in trouble, and so is the rest of the world. Lufthansa, the largest German airline, has cut capacity by up to 90%. Singapore Airlines has all but grounded its fleet… The list goes on.
So the world is probably oversupplied by at least 20 million barrels of oil. If the U.S. economy is expected to decrease by 30% this quarter, that’s a lot of oil filling up swimming pools! Oil must go somewhere once it comes out of the ground, and with the surplus coming in, where will it go?
Unless we see a cut in oil production globally by more than 20 million bpd, oil prices will stay well below the $40 level, where most top-tier U.S. producers require it to be to for them to just break even!
So how did members play this in The War Room?
I recommended they take two tracks…
The first was to buy some speculative producers and exploration companies at the outset. Members did this with an ETF of smaller producers and explorers. That ETF is the SPDR S&P Oil & Gas Exploration & Production ETF. They got in at a split – adjusted at $32 – and sold soon after for a nice gain in just a few days. The ETF is up to $44 now.
During the next session, they entered a spread trade using the bigger ETF names. This time it was the Energy Select Sector SPDR ETF. Members exited that one in a matter of days for another big win of more than 24%!
Action Plan: If oil rallies on any kind of major news from OPEC and Russia, we may consider shorting it until the global economy opens.
Find out how you can play oil in real time by joining me in The War Room now!