On Monday this week, the price of crude oil futures dipped into the negative for the first time in history.
Imagine going to a grocery store and seeing a price tag on an item for -$30.00.
“What?? I’m getting paid to buy oil??”
Now before you go thinking that this is an infinite money cheat code…
Oil Prices Went Negative. EXPLAINED
Crude OIl Futures (Symbol: CLK20) went as low as -$40.32 per contract on Monday.
What are futures?
A futures contract is an agreement to buy or sell a product at a specific price in the future.
Unlike options where you have the right to buy or sell, in this case, you must buy or sell.
And in the case of crude oil, if you’re long a contract, then you must buy oil.
One futures contract = 1,000 barrels of oil.
Which means if you have an oil contract, then you must buy 1,000 barrels of oil. Or rather, you’re getting paid $40.32 to own 1,000 barrels of oil.
1 barrel of oil = 42 gallons
To put this into perspective, this is about 80 2-Liter bottles of soda per contract.
So unless you have storage for 80 bottles of soda and are willing to drive to Cushing, OK to do so, I may want to steer clear of jumping on a negative contract.
So What Happened?
It’s possible that as travel took a hit, both domestically and internationally, oil got hit with a supply shock. Nobody is traveling. There’s less drivers on the road.
However, where this supply/demand shift is real or a speculation, traders were in a rush to exit their oil contracts on Monday, as they would have had to take delivery of all this oil on Tuesday, since the contracts expired on April 21, 2020.
These negative prices reflect these traders’s panic to find storage (since every ship, barrel, container, warehouse, etc. was full).
Reverse Stock Split
Additionally, oil prices have dropped so low recently, more than 80% this year, that even the US Oil Fund (Symbol: USO) has announced an 8-for-1 stock split.
Every 8 shares of USO in the market will now be combined into 1. Since the net value of the company does not change, the prices will be combined to reflect this reverse split.
Which basically means it’ll have a higher stock price at the end.
This is scheduled to take place after April 28. Fortunately if you own any shares of USO, this will all be done automatically for you.
If you own options on USO, the contracts will also be automatically updated to reflect this change.