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What Does Oil Crashing to $1/Barrel Mean?

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Written by Timothy Sykes
Updated 1/10/2023 13 min read

Yesterday, April 20, oil futures went negative for the first time in history. I’m getting a lot of DMs and emails asking, “What does this mean?”

So I want to explain the oil crash in layman’s terms. Then I’ll explain what it means for my niche, penny stocks. And why it’s imperative you prepare now for more market volatility.

How Did the Oil Crash Happen?

Like the rest of the economy, the oil crash has one underlying factor: the coronavirus pandemic.

But to simply blame it on the coronavirus doesn’t provide enough context. If you’re gonna prepare for more market volatility, it’s good to have a basic idea of how this all played out.

Supply vs. Demand

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When it comes to oil prices, the bottom line is supply vs. demand. If there’s more supply than demand, prices drop. If there’s more demand than supply, prices rise.

Right now, there’s very little demand for petroleum. And there’s a huge oversupply. Let’s take a look at those one at a time.

How Coronavirus Crushed Our Thirst for Oil

We’re under shelter-in-place orders. So fewer people are driving fewer miles. Even those still hopping in their cars to go to work aren’t driving as much. Very few people are driving any distance for recreational purposes.

It’s estimated that demand for gas has dropped 50% in the past month. Demand for gasoline in the U.S. is at its lowest in decades. The Energy Information Administration only publishes data back to February 1991 on its website. Gas demand is at the lowest ever in that time.

And it’s not just gasoline…

Fewer people are flying. Jet fuel consumption dropped by an estimated 70% over the same period. Airlines have parked planes and all but stopped flying.

Let’s look at the numbers: TSA checkpoint travel numbers for April 19 show 105,382 passengers. Compare that to a year ago when 2,356,802 people passed through TSA checkpoints. That’s a 95% drop in passenger air travel. 

On top of lower demand, there’s a glut of oil due to…

Price Wars

OPEC and several non-member countries agreed earlier this year to cut production. Their goal was to prop up worldwide oil prices.

Then, in early March Russia disagreed with Saudi Arabia and OPEC on oil production limits. So Saudi Arabia increased production and started a price war.

Here in the U.S., domestic production hit record levels in February and continued into March.

The combination of the price war, record levels of U.S. production, and the drop in demand has done one thing…

Oil Storage Facilities Filled to the Brim

There’s only so much capacity to store oil. In the U.S., our biggest storage facility is located in Cushing, Oklahoma.

The oil tanks there can hold roughly 76 million barrels of oil. It’s estimated those tanks will be full by the end of April. It’s virtually impossible to lease unfilled tanks — they’re already taken.

So too much oil, far less demand, and no place to store the oil pumped today all led to yesterday’s historic situation.

Oil Crash: Futures Drop to –$37 Per Barrel

The May contract for West Texas Intermediate (WTI) crude went negative for the first time in history. What does it mean?

It means traders holding contracts for May delivery were paying other traders to get the contracts off their hands. Without a place to take delivery of 1,000 barrels of oil, you don’t want to be holding a contract when it stops trading.

No storage led to panic selling…

Still, all this is leading to…

Turning Off the Spigot

Oil producers have little choice but to cut production until demand ramps up again. It’s anybody’s guess when that will happen. Even as states like South Carolina, Tennessee, and Georgia announce plans to ease their economies back into action…

… it could take months before oil demand hits pre-pandemic highs.

As of today, oil futures trading rolled over to contracts for June delivery. As I write, they’re trading in the $11s — down roughly 45% on the day. So the oil crash is far from over.

One thing to consider…

There’s a floor price for oil. That’s the lowest price per barrel producers can afford. Below the floor, they’re losing money. Even at $30 a barrel, oil is priced at the floor for some of the best-positioned producers. For others … $50 a barrel is more realistic.

So June contracts trading in the $11s is bad news for the oil industry.

Oil Well Shut In

In the oil and gas industry, to shut in a well means to close it off so it stops producing. And that’s pretty much where the U.S. oil industry is headed. Low demand and no excess storage capacity means they’ll have to turn off the spigot and hunker down.

Until demand returns, it’s likely oil will remain somewhere in the single digits to low $20s.

So you might be wondering … what’s the big deal, right? The oil industry is full of very rich people, right?

Well, yes and no.

Oil requires a lot of up-front investment. So while the U.S. is the world’s top oil-producing country, there’s massive debt. A lot of the shale industry ramped up when oil and gas prices were much higher and financing debt was cheaper. This crash could be more than a hunker-down time for U.S. petroleum companies. There will be bankruptcies.

It might seem cool to see gas prices so low — and to know they’ll likely drift lower in the coming months. But also understand how much the economy relies on our ability to move people and products around. Right now, not much is moving.

What Does the Oil Crash Mean for Penny Stock Traders

First, let’s get one thing very clear…

Oil futures going negative for the first time in history is the latest example of how ‘off’ the markets are.

We’re in unprecedented territory on many levels. The world economy has, for all practical purposes, shut down voluntarily. The underlying factors in the economy were pretty strong before the pandemic.

We crashed the economy to flatten the curve.

The problem is…

… projecting the knock-on effects into the future … we have no idea how long it will take to recover. And I don’t like to guess.

Plus, the amount of money spent to develop a vaccine pales compared to what we’re throwing at the economy to prop it up.

I’d been saying for months that we were due a market correction. We got a market crash. But the longer the pandemic wreaks havoc on the economy, the closer we get to a long and drawn-out recovery.

What I can tell you is…

This Is a Time of Extreme Volatility

Which is actually an opportunity for traders who are prepared. It means more volatile opportunities that can move faster.

Recently, I put together a no-cost two-hour guide called “The Volatility Survival Guide.” At the time I had no idea we’d see an oil crash like this.

But the overall market has been volatile since late February when it finally took notice of the coronavirus. Things really got volatile in early March with the coronavirus-induced selloff. That’s why I created the guide.

Based on what’s happening in the stock market today … it’s imperative you watch it.

Access the FREE “Volatility Survival Guide” Here  

Bears vs. Bulls

When the longest bull market in history came to an end in March, what followed was a crazy period. Wild swings. Huge up days followed by just as big down days. If you look at a Dow chart, it looks very similar to the price action leading to the Great Depression.

Over the past couple of weeks, the market bounced back. Some people even tried to call it the shortest bear market in history. My take on it is this…

It doesn’t matter. 

What you should focus on is all the opportunities in the market right now. And with most of us still under shelter-in-place orders, it’s an ideal time to study. Again, I don’t like to predict the market.

And it doesn’t matter what I think is gonna happen. Nor does it matter what the bald guy on financial TV thinks is gonna happen.

What’s important is that you…

Prepare to Take Advantage of Volatility

This market — and this oil crash — is crazy. And based on what I’m seeing from the government…

… spending billions to prop up businesses but…

… only a few billion to develop a coronavirus vaccine…

… it could stay crazy for a while.

So again, it’s imperative you spend time studying. What should you be learning?

How to Spot Opportunities and Stay Safe

The patterns I’m trading aren’t anything new. I’ve been trading the same patterns for two decades. And teaching them for ten years. But you MUST prepare to take advantage of them.

Embrace the Volatility

Every day I get questions from students and non-students alike…

“Tim, how did you pick that supernova? How did you know it would spike 50%?” 

The answer: by studying and from experience. I don’t know how much a stock will spike. But I know what types of catalysts spike stocks. And I recognize patterns. The past four weeks we’ve seen so many supernovas, it’s hard to keep track.

And today we saw another supernova. Again, it’s nothing new. You can learn this. My question is … are you willing to put in the time and effort to do so?

Supernova Alerts is my latest newsletter. So far it’s been a huge success. So if you want to learn the supernova pattern and potentially benefit from my alerts…

Watch the FREE Webinar Here 

Now Is Your Time

oil crash
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This market is ‘off’ in so many ways. But at the same time the patterns I’m trading … the patterns my students are trading … they’re the same.

The big difference is there are so many opportunities right now I can’t keep track. A few weeks back I wrote about it being a ‘fire at will’ market. I don’t often use that term, but right now it applies.

But you can’t just trade random spiking stocks or take big position sizes. You gotta work on the process and learn to be meticulous. You MUST learn rule #1: cut losses quickly. Ready to learn smarter rules for dealing with a volatile market? Learn more in my Trading Challenge.

My goal is to teach traders to think for themselves, be self-sufficient, and trade through anything. Apply today — if you’re prepared to work your butt off.

I’ll ask again: are you ready? Is now your time? Every day we’re seeing examples of the patterns I teach. It won’t last forever. Yes, there will always be opportunities. But the market is giving us the opportunity to compress time by throwing example after example at us.

What does oil crashing to $1 a barrel mean? More volatility … and more opportunity. Don’t pass it up.

What do you think of the oil crash and market volatility? Comment below, I love to hear from all my readers!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”