When Oil Goes Negative | Podcast Episode #90

0:07
Hey, I’m Ryan Mallory, and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market, and today we’re going to talk about oil and when it goes negative, and what does that mean? Can you just go and get paid for buying somebody else’s oil? Are you gonna be going to the gas station and filling up your tank and telling the gas attendant, hey, give me $50.

0:49
No, it’s really not gonna work that way, guys. It it really is. And in fact, right now, oil carries more risk for the buyer than ever before. And if you’re gonna get into that kind of a market, you really, really need to know what you’re dealing with here. And I’m not, again, I’m not a, I’m not a financial advisor, so don’t take what I’m saying for the gospel.

1:07
This is, these are my opinions. If you’re going to get into it, you need to consult your financial advisor and, and weigh the risks behind it, but I’m gonna talk to you about it just from my own personal perspective, understanding the futures contracts that’s, you know, the drive behind this whole thing because it’s not like you just, it’s not a stock that you’re buying.

1:25
It’s a futures contract. So if you logged on to Facebook yesterday, I’m sure you saw just gobs of people talking about oil went negative, oil went negative. Hey, how can I, how can I get paid to buy some oil, you know, it’s a, well, first of all, you’re not, you’re not buying like a couple of gallons of oil here. You’re not just buying a barrel. If you, if you buy a contract for the futures, you’re buying like 1000 barrels of oil.

1:45
Where are you gonna put that at? It’s like 42,000 gallons of oil. You’re gonna drain your swimming pool, not happening. So take that off the table, OK? And also, what, what you need to remember about these oil contracts is that it’s tied to a date where you have to take delivery. Toward the end of an expiration date, these prices will typically converge with the physical price of oil as the final buyers are the ones who are usually like your refineries or your airlines, and they’re going to actually take physical delivery of the oil.

2:09
So if you’re trading oil and you’re ready to get out of it, you have to get out before the contract expires or basically, you’re taking physical delivery unless you got a place, I don’t, to store 1000 barrels of oil, you gotta sell it. So here’s the crazy thing, and this is what people are thinking, man, I can get paid for buying oil.

2:25
OK, if you would have bought the previous oil contract, let’s say you bought it at a $1 per barrel. Oh. You just got paid $1000 right? Well, first of all, futures are very leveraged, OK? You’re putting up a small amount of money when the asset’s positive to control the assets of a lot more.

2:43
So if you’re buying like the S&P 500, and I haven’t traded futures in a long time, but if you’re buying like the S&P 500 back when I was doing it, it was like 200 or $3000 for one contract and then you were like control like, you know, maybe about 10 15, 20 times that amount in the in the futures market.

3:00
You could get wiped out really fast. So going back to the oil, if you got into the oil contract, let’s say you got in a $1 and I don’t know what the margin requirement is for $1 because you’re really not, you’re not, you’re not really spending any money to, to, to hold that contract, but I’m sure, sure there’s some kind of caveat.

3:16
I haven’t looked it up. But anyways, let’s just say that you, you, you bought an oil contract, one oil contract for $1 a barrel to be paid to you instead of you paying for it. Well, did you see what it did? It like dropped below like $36 into the negative to close it out?

3:31
What would that have meant then? Means it means that all of a sudden you just like lost like 3,700% on your trade. Yeah, yeah. Unlimited loss, basically. You, you start going into assets that can go into the negative. Yeah, there’s, there’s limited losses apparently with oil too now to the downside.

3:47
It’s the first time it’s ever happened in history. Here’s the thing, the the contract that you saw drop over 100% yesterday, that was for a contract that was expiring today. OK. So essentially with storage tanks completely filled up in capacity pretty much at 100, there was nowhere to put the oil. So that means people were essentially pay people to get the oil into somebody else’s hands, so they didn’t have to store it.

4:07
That’s why it went negative. So now you got a new contract going, right? And it’s, it, it was at $26 on Friday. Right now, it went as low as $6.5 per contract. Probably it will go down to $0. Good chance of it. But the volatility is extreme. Guys, this thing went down to 6.5 and immediately within an hour went back up to 13.

4:24
That’s a lot of volatility and she’s like, oh, you could have made 100%, yeah. You could have gone negative, right? I mean, you can’t play this stuff. This stuff is not made for retail traders to really all of a sudden take an interest in. If you’ve been trading it for years and years and years, OK, go about it at your own risk, but if, if you’re just all of a sudden trying to look for a free, free handout thinking that, oh, they’ll pay me to, to buy an oil.

4:47
Contract and not look at the potential risk ramifications and it took me a while to think about the risk ramifications yesterday as it was playing out. But yeah, I mean, if you buy it for a $-1 a contract, an oil contract, and it goes down to $-3 you just lost 200%. So you’re, you’re actually owing.

5:03
You don’t want that. It’s a whole other world once you start getting into negatives because there’s an infinity to the downside, right? We learned that in 5th, 6th grade math class, just like there’s an infinity to the upside, there’s an infinity to the downside. So, you know, the risk with shorting stocks is that your risk is undefinable per se and just like, I guess now when you’re buying oil, your risk is.

5:23
Undefinable as well to the to the downside on a long position. So what you have here is you have a lot of supply issues, which stocks are actually the ones that are benefiting from it? It’s your tankers. Your tankers have been in the sewer for just years and years and years. You take TK tankers back in ’08, this thing was trading at over what, $200 a share, and at the lows of 2019, it was all the way down to $7.

5:46
At the lows of February, it was as low as $12 and what has it done? It’s doubled in price. That’s because these people are storing. Storing oil for people, that tankers, tankers are going up because they’re the place where you can store some of this excess oil. Take STNG for example, right? That thing has gone on the weekly chart from, from a low of 1250 all the way up to 24.

6:06
So if you’re looking for a play in the stock market, you might wanna might wanna focus on these tankers, but even now, kind of late to the game because these things have been just rally for 34 straight weeks and, uh, the opportunity, the risk reward is probably not as good as what you would want in a, in a particular trade. And here’s the other thing too, even in the best of environments, I really don’t like trading energy stocks.

6:25
I will. I’ve traded Hess in the past year, make success, but I will trade them. From time to time, Apache oil, I’ve, I’ve done those. I mean, thank God I’m not in them right now, but I will trade them because I actually think that from time to time they do provide good opportunities, but energy sector as a whole is a very complicated sector, and then it’s also one of the more volatile sectors because if oil takes a dump overnight because somebody.

6:47
Uh, did something in Saudi Arabia or in some cases I’ve seen it to where somebody lit a refinery on fire, right in the Middle East and then all of a sudden, cost of oil goes up, threat of war, oil goes up. If you shut down the economy, oil goes in the negative. Lots of risk with oil.

7:04
Here’s the thing. Most of you that listen to my podcast are probably retail traders, and by retail traders, I mean like individuals who trade for themselves are not trading for an institution or anything else. I’m a retail trader. But really trying to play this oil market as a retail trader is, is kind of suicidal in a sense, because especially if you try to go into the futures market and you have no experience, that’s gonna get you in trouble.

7:25
You trading energy is for some of the most shrewd and politically savvy people who understand the the global political environment. I majored in economics and political science in college. I, and here’s the thing, I’m not gonna touch that stuff, OK? So if I’m not gonna touch it, maybe you shouldn’t touch it either.

7:42
There’s just a lot of risk when it comes to oil stocks and even more risk when you want to go diving into futures, but thinking that maybe they’re gonna pay you for an oil con. I mean, you can’t even get negative, negative prices right now because that contract is done with. So we’re on a new contract.

7:58
Towards the end, a good chance if this coronavirus hasn’t alleviated some of the oil supply, you’ll probably see the price of oil go back down to zero again. And here’s the other thing too, it’s not just oil that makes futures trading difficult. Futures trading as a whole is extremely hard, but you have a lot of margin.

8:14
It’s very easy to wipe yourself out if you get too heavy on, on a particular position. Greater men and women than you or I have lost their hides trading. Futures. I’ve done it before. I didn’t like it, quite honestly. I didn’t like the the risk that was associated with it. I didn’t feel like that I could properly control the risk.

8:30
Big moves in the market can wipe you out and then it can also make you super rich too, but you have to use stop losses in those things. That’s for sure. You gotta use stop losses and everything, but in that one, I mean, you’re, you’re playing Russian roulette without a stop loss. Well it’s funny. Too, though, I have mentioned this earlier in the podcast that people were talking about, oh, I’m gonna get, I’m gonna get free gas.

8:49
No, you’re not gonna, you’re never gonna see free gas. OK. The day that happens, either the Fed just went off the rocker with bailouts and, uh, free money or the economy is just absolute trash. I can’t even think of a scenario where you would get free gasoline outside the Fed saying, hey, we’re giving away free gasoline.

9:05
It’s just not gonna happen. The other thing too about, about oil, oil isn’t gas. You actually, there’s actually a futures market for, for gasoline. You can trade gasoline. But the thing is, oil is not gasoline. So you gotta refine it, you got to ship it. People got to mark it up so that they can make a profit off of it.

9:21
There’s taxes associated with it, like tons and tons of taxes, especially if you live on the West Coast, tons of taxes on the. On a gallon of gasoline. Where I’m at right now, gasoline is like $1.70 a gallon. I think it could get down to $1 for sure. For sure it could get down to $1.

9:38
Uh. But I’m not gonna see like, you know, 1950s, 15 cents a gallon or something like that. That’s, that’s not gonna happen. I don’t even think you would have gas stations at that point. I think just like can’t run this show anymore, guys. So you, you really don’t want it to get that crazy.

9:54
So wrapping this up, what I would tell you guys, stay away from the energy stocks right now. I know people were in those like they were back in the cruise lines a few months ago. Did the cruise lines trades really work for you? Some of you sure. But did it work for all of you guys? Probably for most of you it didn’t. I bet you there was a lot of you guys that said, hey, CCL at $20 a share.

10:13
Man, this thing was just trading at $50 not too long ago. This is a once in a lifetime buy. And where is it at right now? $11. NCLH, man, this thing was trading at $60 back in February. Got to get into it. It’s at $20 a share. I’m loading it up. In fact, I know somebody who did this. I went to dinner with somebody one time and they were telling me how they were buying Norwegian cruise lines.

10:32
I’m like, no, no, no, no, no. I like, what’s cheap today can get super cheap tomorrow. Guess where it’s at? And first of all, they did not listen to me. Second of all, it’s at $11.03 as I’m talking about it right now. So everybody’s like, hey, I gotta get some oil, man. I gotta, I gotta buy USO or something, right?

10:50
USO is trading at $2.88. This is an ETF, the United States Oil Fund. You’re like, man, this is, this is a bargain. It was just at $13 back in February. But guess what? It goes from $2.86 down to $2. You lost a good chunk of your change right there, guys.

11:07
What is that like 30%? Yeah. You just lost a good chunk. It goes down to $1. You’re, you’re really hurting. You’re like down 60%. So don’t do it, guys. You don’t have to go after these high risk plays in order to make money in the stock market. And if you do, you’re thinking about the profits and not the risk. And what do I always say in this podcast?

11:23
Man, I sound so redundant saying this every episode. Manage the risk, the profits will take care of themselves. You can’t manage the risk in oil. Man, oil is doing all sorts of crazy stuff at night. The overnight gap risk is insane. USO closed at 4:25. You would think that that was a bottom, right? No, it’s at 2.79 today, went as low as 2.30-ish.

11:41
You should never trade something that you don’t have an ability to control the risk. Yes, bad things happen. You could be like somebody that decided, hey, I’m gonna go long on LK at $30 because I think there’s a bullish pattern, there’s not. But let’s say you thought there was a bullish pattern on an LK and then all of a sudden you find out that the COO or the CEO or somebody on staff there was committing fraud, which it did happen.

12:06
Stock goes from 30 down to 6.50. Yeah, you didn’t know that was coming, OK? So that’s, that’s risk that you don’t have much control over, OK? But it’s such a rare event. It’s like a black swan for a company, right? I mean, they, they haven’t even traded since all that came out. But here’s the thing though, even in a situation with LK you can control the risk somewhat by making sure that you don’t go completely long on something.

12:27
Don’t put 40 or 50% of your, your money in one particular stock. Yes, you may take a big blow like shareholders of LK had happen to them, but if you were managing the risk by managing your position sizes, yes, it, it hit you pretty hard, but it wasn’t unrecoverable. That’s gonna do it for today.

12:43
I appreciate you guys listening to me. Feel free to email me anytime you like, and, uh, God bless. Thanks for listening to my podcast, Swing Trading the stock market. I’d like to encourage you to join me in the SharePlanner trading block where I navigate the stock market each day with traders from around the world.

13:00
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13:22
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.