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  • Writer's pictureIshfaaq Peerally

Oil Trading on eToro - Don't Trade!

Oil prices have crashed to zero and then went negative this week. I know that many of you want to take this opportunity. This is maybe a once in a lifetime opportunity. But you need to be careful. I've got many questions these past days regarding oil and especially trading it on eToro. I'm going to answer these questions and then tell you what I think is the best thing to do right now. 1. Why the price of oil on eToro didn't go to zero? eToro prices are for the June 2020 contracts. The contracts that went to zero are the May 2020 contracts. Different brokers provide different contracts on their platform and eToro provides the one that will expire in two months time. Usually, the difference in prices between the 1-month and 2-month futures contract is small but things have changed lately and we have entered a contango (I'll explain about that down below). 2. Why eToro put a limit on the take profit to 100%? I cannot answer for eToro. This is my personal opinion but I believe that as a responsible broker eToro needs to make sure that its users and itself are protected against huge losses. If you invest in something and it goes to zero, you lose your investments, if it goes below zero, you can lose much more. Even someone not using any leverages, having just 1% of their portfolio in oil could lose a lot of money. In recent days, I've seen posts of people losing thousands of Dollars on oil. These are unusual circumstances and I would not advise anyone to trade oil right now since there's no way you can win. Like I said, this oil that most traders buy is just a contract. These contracts are issued months or even years in advance. I found oil contracts for December 2031. Usually traders buy these contracts and then sell them just before they expire and move to the next contract. Traders don't want the oil to be delivered to them. But this time, they cannot find anyone to sell the contracts to and that's what is causing oil prices to go down and even negative. Storing oil is costly and believe me, hedge funds don't want oil to be stored in their offices, it is smelly. Even ETFs such as USO don't want the oil to be delivered to them and they had to sell even more of the May 2020 contracts. Algorithmic trading triggered even more selling and we got a situation where oil price dropped to -$37 a barrel. A contango has been created where the spread between long-term contracts and short-term contracts is very high. Oil contracts for next year is trading for $40 a barrel but for next month -$40. That's a huge spread. You can see the chart from Monday attached below. Oil traders now will take this opportunity to buy real physical oil barrels and then create new contracts for the coming months or years. Real physical oil costs about $20/barrel right now. If they are able to sell these at $50, that's a 150% profit. This is a form of arbitrage. These big hedge funds and other institutional investors will find a way to store the oil. They can afford to buy tankers and other storage facilities. You see what's happening here. There are some institutional investors who want to buy the physical oil while selling the oil contracts and others who want to do the opposite. It is very hard for retail investors to try to trade oil and win right now. This is not a game for retail investors. Trading oil contracts or USO will be just gambling right now. These big institution have the resources to know what and when to buy. You don't. They use satellite imagery to measure the length of shadows in oil tanks (WSJ wrote an article about it a few months ago - Google it). If you cannot buy an oil tanker or buy live satellite images, oil trading is currently not for you. But you can still take this opportunity to invest. One thing, you could do is to look at oil tanker stocks. Many oil companies are going bankrupt, you could look at these distressed assets and find opportunities there. You could also look at oil companies with good balance sheets. There are multiple options to take full advantage of this oil crash. Oil is the most important commodity in the world and it will certainly go up in price in the future when things get back to normal. Oil is also cyclical. But trading oil futures contract right now is a very dangerous game and I wouldn't advise anyone to do that. Once things settle down, then you could get back to trading oil. Sometimes, it is better to stay on the sidelines while the big players are fighting each other. You don't want to be collateral damage. I'll make a video later today explaining with more details about the contango, the oil crash, the opportunities. Now, if you think that you know how to trade oil and your technical analysis still works with negative values, it is up to you. I'm not going to stop you from trading oil or oil ETFs but just be careful.

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