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  • Writer's pictureIshfaaq Peerally

Oil Crash. Negative Oil Prices. How to invest?

Oil prices $OIL fell below zero on Monday. What does this really mean and how do we invest in oil? We need to understand first why oil prices have been going down in recent years and this year. Oil prices reached a record price of $140/barrel in 2008 and then another peak in 2011 but from then, it crashed. It is because of an oversupply of oil in the market. Russia and Saudi Arabia(and other OPEC countries) used to be the major producers. But when the US became the largest producer, it caused an oversupply in the market. This year things got worse with the lockdown as demand for oil has also fallen. Saudi Arabia and Russia decided to go into an oil war which further lowered oil prices. Neither Saudi Arabia, Russia or the US producers want to lower productions to limit the supply. What happened last Monday? We need to talk about how oil is traded first. Oil is traded with futures contracts. These contracts have expiration dates and if you hold an expired contract, you'll receive oil deliveries the next month. The contracts for May 2020 expired last Monday and that's why traders had to sell these as soon as possible in order to avoid the deliveries (storing oil is costly and smelly). It was hard to sell these contracts since all the major oil storage capacities are full. ETFs such as USO $USO had to sell there contracts and they even switched to two-months contracts. This further caused oil prices to crash. Algorithmic trading caused a further crash. How we make money from that? We need to understand what is contango. Contango happens when there is a big spread between short-term oil futures prices and long-term oil futures prices. We are having a contango right now. Institutional investors will try to make money from this contango by arbitrage. You can buy physical oil today at about $20/barrel and sell a futures contract for a year from now at $50/barrel. Then you store the oil and sell it after one year. You've made a 150% profit with zero risks. This oil will need to be stored somewhere and since most of the land storage are full, they will need to store oil in tankers on sea. One way to invest is to invest in these tanker stocks. Another option is to look for value stocks in the oil industry. So many oil companies will go bankrupt and some of them are at real value. oil is still the most important commodity in the world and in the future, prices will rise again. This is a good time to invest in oil. Watch the full video on YouTube and Subscribe: You can find my other analyses on my research partnership: Join my private investing group on Facebook for more:

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