Liquid Alternatives: Oil Makes History Pricing Below Zero; An ETF for the (Eventual) Rebound

Producers are paying buyers to take their oil, on looming fears of maxed out storage.

The price of WTIC crude crashed to as low as minus $37.63 per barrel on Monday. The seemingly absurd pricing was triggered by the expiry of May’s future contracts scheduled for Tuesday. A trader would have to receive deliveries on any May contracts remaining open, and store the oil at exorbitant rates.

Demand destruction

Oil prices have therefore broken lows going back to 1946. These massive anomalies in this market have been triggered by the total collapse in oil demand due to the economic and lifestyle impacts of the coronavirus. Lockdowns across the globe have shut down economic activity and people are staying at home.

However, likely, the low prices will eventually force producers to shut-in some production. This combined with OPEC+ cuts, SPR buying and resumption of economic activity could lead to better prices for oil by the summer.

The market seizures would also discourage investment in new wells. So supply growth will curtail to some extent in the medium term.

Taking a long-term punt on oil

Are you a long-term investor convinced that oil prices will rebound from the lows triggered by a black swan event such as the coronavirus?

Then you might like to invest in an ETF that invests in oil producer stocks. ETFs that invest in oil futures may not be a good idea given the extreme volatility (as detailed above on negative pricing) in the futures markets.

Even better, invest in an ETF that holds the biggest, and most integrated oil companies. This way you eliminate risk from potential bankruptcies.

Energy Select Sector SPDR Fund (NYSEARCA: XLE)

The ETF tracks a market-cap-weighted index of US energy companies in the S&P 500. “XLE offers supremely liquid exposure to a marketlike basket of US energy firms. “Marketlike” in the context of the energy sector means concentrated exposure to the giants of the oil and gas industries. XLE pulls its stocks from the S&P 500 rather than the total market, so its portfolio is somewhat smaller than that of peer funds, and it favors large-caps.

Still, it represents the overall market very well, is extremely liquid, tracks well and charges low fees of 0.13%.

Related Story:   The DailyAlts Playbook: $0 Oil, How to Play Recreational Cannabis, and Why Macy’s Is Selling RE-backed Bonds…                                               

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