Oil and water doesn’t mix! So, does the same rule follow for oil and markets? The experts on either side diverge. Oil and the stock market is much like oil and water.
The recent downward spiral of oil prices is probably leading to one of the darkest moments in oil’s history. The demand for the product is collapsing because of the coronavirus crisis. So as the need for oil dwindles, the world, not just the US, is literally running out of storage space.
The problem is so great that the price of a barrel of oil actually turned negative this week for the first time in history. With markets still moving up and down day to day based on the battle between economic and COVID-19 data, this week OIL prices have been added to the mix.
The challenge with the oil market is this: production (especially in the United States) is at all-time highs and usage (due to coronavirus) is at lows. This contrast in fundamental supply and demand is causing a shortage of storage space for oil.
Futures contracts are designed to forecast the future price of certain commodities, like oil. These expire every month and the May contract just expired requiring contract holders to take delivery of oil at the price quoted.
Since oil storage capacity is full, contracts actually went negative, indicating holders were willing to pay producers not to take delivery. In January crude was over $60 a barrel, today it’s down to just $13 a barrel. What does this mean for you and me?
Ironically, when oil prices are high the stock market sometimes struggles as the argument is that our cost of living goes up, putting strain on our other spending. But, when oil prices dip as they are right now, the stock market can also struggle as the economy worries about industries that are dependent upon higher oil prices for their profits. For now, it’s just another variable added to an already volatile situation.
Current economic forecasts are strongly divided as the economy gets set to re-open. You will hear brilliant minds arguing that the impact of the virus has not yet been truly felt and that we will see a re-test of the market bottoms heading into the summer.
You will also come across equally brilliant minds stating that testing, treatments, and vaccines will continue to improve, the economy will gradually re-open, and that the stock market will generally rise up from here.
Our indicators point to a mid-point prediction, neither pointing to a clear direction up or down. We believe it’s time to have exposure in stocks but to avoid being over-exposed to risk. As parts of the economy get ready to slowly re-open, we hope that everyone steps out cautiously and remains safe and sound.
Note: some of the content is take from a regular update from The Wealth Enhancement & Preservation Team.
*Past performance is no guarantee of future results. Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.