This story was originally published here.
The oil markets are being whipsawed once more…
On Monday, the price of West Texas Intermediate (“WTI”) futures imploded. They went negative for the first time ever.
The problem is that domestic storage capacity is disappearing. Demand for fuel products has crumbled as the world remains in lockdown… So everyone in the oil markets is looking for places to store the commodity. They're hoping they can sell it later at higher prices.
No one wants to be stuck taking physical delivery of oil without a place to store it. As a result, financial traders and speculators who owned oil futures with May delivery were desperate to get out ahead of expiration.
They were willing to sell at any price… even if that meant paying someone to take it off their hands. And so, prices went negative, going as low as negative $40.32.
The crazy part is that this isn't the only force at work. It turns out that a misunderstanding of exchange-traded funds (ETFs) is also to blame.
Let me explain…
The crazy story behind what's going on is all about oil-related ETFs. Given the dire economic news and the consequent plunge in oil prices, it seems many investors have decided now is the time to buy oil.
The United States Oil Fund (USO) saw record daily inflows of $552 million on April 17… and record weekly inflows of $1.6 billion for the week of April 13.
Overall, oil-related ETFs have seen their net positions rise from $204.5 million at the beginning of April to $6.3 billion now. That's an increase of 30 times in just a few weeks. You can see it in the chart below…
The odd negative number is a result of the wonkiness that happened on Monday. And interestingly, that wonkiness was a result of these massive inflows. They created a different problem. It has to do with how the funds operate…
Typically, when the economy is doing well and demand is strong, oil contracts trade in something called “backwardation.” That means oil for June delivery is more expensive than oil for July delivery.
But now, because of weak near-term demand, we're in what is known as “contango.” That's when oil for June delivery is cheaper than July delivery.
The problem with oil ETFs is that they use futures to track the oil price. And they're built more for stable oil markets.
Around expiration, they short the oil contract for the month with the nearest expiration date (or “front month”) and buy the next month's contract. That may work in smoother markets… but not so much in times like today.
Whenever you sell short, your goal is to “sell high and buy low.” So if the funds are shorting at a lower price and covering at a higher price, they're losing money. Anyone that buys and holds these contracts is suffering. That leads to the real issue…
Editor's Note: To keep reading, click here.
Alarming shift by wealthy Americans could send $7 stock soaring
I just read a troubling report from the United States Securities and Exchange Commission.
It appears that some of America's richest investors are dumping shares of tech stocks at an alarming rate.
Berkshire Hathaway, for instance, dumped 2.9 million shares of Apple earlier this year.
Appaloosa Management sold more than half of its stake in Facebook.
And Amazon founder Jeff Bezos recently sold off nearly $3 billion worth of his own company's stock.
It turns out that instead of pouring money into high-flying tech stocks…
Investment dollars are flooding into a different corner of the financial markets.
And it's only just beginning.
My colleague, Bill Shaw has put together a brief presentation to explain the surprising reason behind this massive shift – and how it could send a specific $7 investment soaring in the weeks ahead.
