Chart of the Day – You Have Been Warned about the Crude Oil Hazard

Investing in quarantine (
  • Two weeks ago, we wrote about the enormous dangers of buying crude oil and the benefits of purchasing cheap energy stocks instead.
  • This week, the historic collapse in crude oil prices has proved this perfectly.


Two weeks ago, on the seventh of April, we wrote that buying crude oil is extremely risky in this crisis. In particular, in the longer term. In the current situation, the investor may suffer a monthly loss of 10-20 percent for a phenomenon called contango. Nor did we expect the crude price to collapse so quickly. But the warning was helpful to those who took it. (Read: Crude Oil Buy Is an Extremely Dangerous Play)

Panic of Crude Oil Delivered to You

The U.S. oil market has developed so much overproduction and storage capacities are so full that the May futures price collapsed on April 20th. A severely negative price level was registered. The buyers of oil paid anyone willing to take the oil from them. Many small investors and exchange-traded funds (ETFs, bought in big part also by small investors) have tried to get rid of their long positions. At any cost. They didn’t want the oil to be physically delivered to them after the contract expired.

The phenomenon is sensational, unique, as there has never been such a price anomaly in the history of crude oil. Although there were already many similar traps in the derivatives markets. Many years ago, for example, investors shorting shares in German Volkswagen car maker company were in a bad situation. They also had to buy back their short-sold shares at all costs, whatever it takes. There were not enough securities in the market. Any price was acceptable to stop their losses. The price exploded, of course, and with it the losses of the short-sellers. More recently, the popular shorting of Tesla or Virgin Galactic Holdings also had dire consequences for some investors.

U.S. WTI Crude Oil Contract (Purple), North Sea Brent Crude Oil Contract (Dark Green), USO U.S. Oil ETF (Red), and XOP, FILL, and XLE Energy Equity ETFs.
Chart: U.S. WTI Crude Oil Contract (Purple), North Sea Brent Crude Oil Contract (Dark Green), USO U.S. Oil ETF (Red), and XOP, FILL, and XLE Energy Equity ETFs. (

Energy Stocks Are Fine

As the chart shows, the world’s largest oil ETF, the USO (United States Oil Fund), has lost huge amounts of money in the collapse of crude oil prices. While the near-term WTI crude oil fell by 81 percent (right axis), the ETF also as much by 78 percent. Three different oil stock ETFs, the US XOP, the global FILL, and the ETF of the S&P 500 index oil sector, lost much less than the oil itself. (And stock prices can be never negative.)

As we wrote two weeks ago, the purchase of oil futures is now a constant loss to buyers because of the contango. Even if the price level does not fundamentally change. Meanwhile, oil stocks, or at least some of them, can also pay dividends. Although, the extent of payouts is now likely to decline due to the oil crisis. In the long run, in some years, it could be a significant source of passive income. “Buy when there is blood flowing in the streets” – so the famous quote. The oil market is now full of blood.

The New Quarantine-Investors

Panic sales, that was it. Especially inexperienced small investors, so-called oil tourists may have caused this crude oil crash. Many of them were rushing into the oil market in the last weeks. Due to quarantine, poverty, and the crisis, many are now trying to find new sources of passive income and many are going to stock and commodity exchanges. Most people want to make fast money. But they don’t know that passive income is a long-term game. (Read: Is It Only a Myth? – the Genuine Truth About Passive Income)




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Disclaimer 1

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

Disclaimer 2

I have open positions in silver (long), platinum (long), global energy stocks (long) and crude oil (short) at the time of writing.


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