Market Overview

'An Outlier Event': Experts React To Oil Prices Dropping Below $0

'An Outlier Event': Experts React To Oil Prices Dropping Below $0

June contract WTI crude oil prices plunged another 24% on Tuesday to $15.32 after May contracts dropped below $0 for the first time in history on Monday. U.S. crude oil storage capacity is maxed out as COVID-19 stay-at-home orders and travel restrictions have pushed oil demand to near zero.

The unprecedented oil price action this week has rattled stocks, but experts say this price action is merely a temporary phenomenon.

Stocks To Avoid

David Trainer, CEO of New Constructs, said investors would be wise to look past the near-term oil market volatility, but that doesn’t mean there’s no risk within the oil space.

“Stay away from Exploration and Production firms as well as Oil Services and Equipments firms and focus more on the Refiners and Integrated Oil firms who take less price risk and serve more as middlemen between producers and consumers,” Trainer said Monday.

New Constructs is bullish on stocks such as BP plc (NYSE: BP), Marathon Petroleum Corp (NYSE: MPC), Phillips 66 (NYSE: PSX), Total SA (NYSE: TOT) and Valero Energy Corporation (NYSE: VLO).

The Historic Trading Action In Oil, Explained

Rebound Ahead

DataTrek Research co-founder Nicholas Colas said WTI futures contracts for September and beyond are still priced above $30, suggesting a strong rebound in oil prices once the storage issues have passed.

“Those quotes signal confidence that today was an outlier event and energy commodity prices will slowly rise over the balance of 2020; that fits with what equity prices are saying as well,” Colas said.

He noted that even with crude prices trading as low as negative $40 per barrel on Monday, energy sector stocks are still well off their 2020 lows.

Benzinga’s Take

Tuesday’s trading action in crude oil was more a function of market dynamics than an actual representation of the value of a barrel of oil. However, traders looking to buy the dip in oil ETFs like the United States Oil Fund LP (NYSE: USO) should understand that, given the economy remains on lockdown indefinitely, there’s a good chance oil prices could experience a similar phenomenon next month as the June futures contract expiration date approaches.

Do you agree with this take? Email with your thoughts.


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