Negative Oil Prices Rattle Investors

New York, New York (PPD) — Oil prices did the unthinkable yesterday as the Crude Oil WTI (CL) futures contract traded with a negative value. In fact, it traded with not just a whisker of a negative value of maybe -$0.20, or even -$1.00, but a whopping -$20.00 to -$37.00/bbl for most of the mid afternoon before mounting a furious rally in after hours trading to close out the day with a value of -$7.25/bbl.

Just to be clear, the May oil futures contract expires at 2:30 pm this afternoon and it represents the obligation, not the option to take physical delivery of a barrel of oil. The immediate issue is storage. With most of the world’s economies ranging from a partial to near complete shutdown, storage facilities for oil anywhere in the globe are topped to the brim.

Equity market investors were not amused.

Major stock market averages gave up a large chunk of their gains from Friday, almost entirely in response to historic plunge in oil prices. Most of the stock market selloff came during the afternoon as oil prices declined, first from +$10/barrel toward $zero, before descending negative by as much as -$37/barrel.

The Dow Jones Industrial Average (^DJI) declined -2.4% Monday after gaining +3% on Friday. The Dow settled at 23650.44, nearly +28% from the March lows.

The S&P 500 (^SPX) lost -1.8% to settle at 2823.16. At the end of last week the S&P 500 closed above its 50 day moving average for the first time since February 21, literally a day before the Coronavirus selloff began. Today the 50 day MA is at 2852.

The NASDAQ Composite (^IXIC) gave back -1% to settle at 8560.73. The NASDAQ is the only major market average above its 200 day moving average, having closed above that benchmark 4 of the last 5 trading sessions. With yesterday’s decline, the NASDAQ slightly less than +2% above its 200-day moving average (MA) of 8407.

The Russell 2000 (^RUT) outperformed the larger capitalization indices over the last 2 days. On Monday, a loss of -1.3% came after gaining +4.3% on Friday. The Russell, at 1213.35 really needs to post a string of closing prices above the 1250-1260 level to convince us that it’s turned the corner.

The Early Line

Stock markets in Europe are lower by -1.5% to -2.5% half way through their trading day. Let’s put in context that European stock markets had posted gains in 8 of the prior 9 trading sessions and were poised for a pause if not a mild pullback.

Early trading in U.S. Stock Index futures is projecting a decline for Major Market averages ranging from -1% for the NASDAQ Composite (^IXIC), to -2% for the Dow Jones (^DJI). There’s every reason to expect another volatile day of price action with investors keeping close watch on oil prices.

Oil Prices

Keep in mind that while today, the June contract becomes the “front month” for oil futures trading, some financial news outlets may still highlight the value of the May contract which expires at 2:30 pm for no other reason than a fascination with the shock impact of negative numbers.