Is Oil a “Good Buy” Right Now? No, and Here’s Why

Another day, another drop. The COVID-19 rally has officially stalled now that oil prices are in the gutter.

For market bulls, that’s bad news.

But it also could represent a huge buying opportunity in a few specific places.

The Dow, S&P, and Nasdaq Composite are down 2%, 3.1%, and 4%, respectively, as of midday. Each index started the session lower and sunk further as crude oil continued its descent.

The WTI May futures crude oil contract – the one that went negative on Monday – managed to recover to over $4.00 today, narrowing the colossal spread between it and the June contract.

That does not mean, however, oil prices are rising quite yet. The June contract is down over 30% to $14.27. It closed on Monday at over $21.00.

Instead, the May futures “flip” suggests that panic-selling could hit Wall Street again, even as medical centers across the U.S. report fewer coronavirus hospitalizations.

“If we ever needed a reminder for the extent of the abrupt decline in global economic activity, it is the fact that WTI oil futures saw a negative price,” Tom Lee, head of research at Fundstrat Global Advisors, wrote in a note.

“But oil is a residual issue of the broader global “stay at home” and this situation will not change until Western nations and US states begin opening up. And they cannot open up until each jurisdiction feels they have a handle on the healthcare crisis.”

And so, like the rest of the economy, oil prices also hinge upon a medical solution; be it a treatment drug (like remdesivir), vaccine, or mass testing.

To get a better gauge on the “real” value of oil, traders are looking to the United States Oil Fund (NYSE: USO), an ETF that buys crude oil futures spread out across different months. It provides investors with the ability to buy (or sell) an aggregate of the crude oil futures market, which at present, is getting absolutely crushed.

In other words, there’s more to it than the notorious May futures contract, set to expire later today. USO shows just how dire things have gotten, and more importantly, the comparatively small impact that the May futures contract had on Monday. It’s true that the June and July contracts fell on Monday, but not nearly as much as May’s, causing USO to drop only 10.93%.

Today, USO is down over 20% as the rest of the futures market comes to terms with the current economic climate. With the world still in lockdown, nobody needs nor wants crude. Barrels are stacking up at storage facilities spanning the globe.

It’s a supply chain nightmare, and if the U.S. economy doesn’t re-open soon, it could force stocks to re-test their COVID-19 crash lows.

However, oil’s arguably oversold state also presents traders with an immense opportunity to go long on an essential commodity. Eventually, we’ll get back to business as usual. Crude oil will undoubtedly rise as we make that transition.

Does that mean it’s time to buy crude right now? Probably not. Until we see USO recover, the selling could easily continue.

However, bargain-hunting investors will want to keep a close eye on USO over the next few weeks. If momentum shifts and oil makes a comeback, it could potentially become the best performing investment of 2020.

Especially once COVID-19 is finally defeated, sometime (hopefully) later this year.


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