Oil closed at negative $37.63 per barrel; that’s minus -$37.63. It was a historic, never-seen-before moment. In the world of futures and commodities trading, it is hard to get your head around the mechanics, but it’s the equivalent to paying someone almost $40 to haul away your pristine barrel of light sweet crude. Huh? In today’s upside down, pandemic world, stories like these helps illustrate the fundamental laws of supply and demand.
We have friends in France that provide milk for local cheese producers. Normally, they sell 1,000 liters of milk for around 300 euros. Today, they are selling that same milk for one euro because the cheese producers are shut down. At least it’s a positive number. And if they couldn’t get a euro for it, they have the option to pour it down the drain. Oil producers don’t have that luxury and they can’t just burn their oil because they would be fined for doing anything environmentally unfriendly with their product.
This is the problem for oil producers. Demand has gone down to the point where there is not enough storage for what they are producing and the effect on pricing is obviously extreme. As economies around the world eventually get back to normal, and demand for gasoline and other petroleum products goes back up, this situation will normalize. But not all producers will be able to get through the crisis. When you apply these lessons to industries across the board, you can start to imagine the effects. Times like these also produce rare opportunities to buy into investments at prices that are difficult to imagine, but you have to determine the risks. At the same time, positions that were once attractive might not offer the same perceived stability as before. This is why controlling emotions during severe market volatility is so important. Supply and demand are never static.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All guarantee of future results. All indices are unmanaged and may not be invested into directly.The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.The fast price swings in commodities and currencies will result in significant volatility in an investors holdings.