April 29th
For the first time in history, the price of Western Texas Intermediate (WTI) crude oil dropped below $0. While it may feel good to fill up your vehicle at the gas station these days, this is it yet another sign that we live in economically unpredictable times and that we must choose our investments wisely.
Historical Oil Highlights
The past 150 years of oil-price history has held interesting times before. Some may remember the painful oil embargo of the 1970s, which forced drivers to wait in lines that snaked around the block and led the government to introduce a national speed limit of 55 miles per hour to conserve gas. It also caused the price of all oil to rise significantly and steadily overtime.
Prior to the financial crisis of 2008, oil prices had reached an all-time high of $145 per barrel. Most of us remember paying around $4.50 or more per gallon at the pump. It was a time when the global economy had been booming, international demand for oil had been high, and fracking for oil in the U.S. hadn’t been wide spread yet. Once the financial crisis hit the world, the price of oil dropped by $100 per barrel in a matter of months. See chart “Price of WTI Oil Futures 2000 - 2020” for details
Crude Oil Worth Less Than Worthless
What happened in April of 2020 was unprecedented in the history of oil. For the first time, the price of WTI crude oil futures dropped below zero. This means holders of future contracts were willing to pay others to accept the delivery of oil on their behalf. What would cause such a situation to happen?
We are all aware of the global economic effects of Covid-19. Many governments have ordered national lockdowns, airplanes have had to remain on the ground, and people were asked to work from home. All this caused global economies to slow. Accordingly, the demand for oil and oil-based products such as kerosene and gasoline has slowed significantly.
Meanwhile, production of oil has continued at a similar pace as before, because shutting down oil sites is risky for producers. It can damage the oil site itself and restarting production is often difficult. Since the demand for oil has dropped, the excess supply needed to go into available storage facilities. However, oil storage capabilities are limited and so in April of 2020 most facilities had been filled to their maximum capacity.
Future contract traders who were speculating on the oil price held futures that would expire on April 21st, 2020 and thus require the contract holders to take physical delivery of the oil in Cushing, OK in May 2020. The price plunge of WTI crude oil futures that occurred just prior to the last trading day, reflecting the panic realization of crude oil traders that oil may have nowhere to go. Not being able to take physical delivery of the oil specified in the future contracts would cause the traders to pay hefty penalties. Consequently, traders began selling off their oil future contracts at negative prices in hopes of finding buyers. In doing so, the price for one barrel of WTI crude oil dropped to -$39 per barrel for the first time in history. See chart “Price of Oil WTI Futures in April 2020” for details.
As you can see, we are currently experiencing uncharted economic times which have caused events that were previously thought to be impossible. Who could have predicted that oil would be worth less than nothing?
In times like these, we would like to offer you a form of investing that focuses on principal preservation while still allowing for the steady streams of monthly cashflow associated with rental real estate. We encourage you to take a look at the concept of First Deed Lending, which provides you with the advantages of owning rental property, without the hassle of being a landlord.
