Podcast – Episode 86 – Did Oil Prices Really Go Negative?

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Podcast Transcript

Passive traders, how you doing? What’s going on? Hopefully, you are safe and sound wherever you are listening to this and I hope the markets are treating you fairly. Or, better than fairly, because we want what’s fair, right? We want, in our favor. So we had a question from someone coming in and the question was, is it still, or is it a safe time to get back into the oil markets? And if you are following us, you might know that I do have a coaching program where we teach people how to trade oil options and these are futures oil options. And I have been doing so for, it’s been over five years now, I believe, quite well, actually. And so that’s why a while back I started teaching people how to do it. And now we have, I think we have close to over 400 people that have gone through the program and lots and lots of success stories. Lots of people are very happy that they’ve joined and we do have a few openings and people are still coming in.

So really, I wanted to talk about oil and what has happened in oil this year in 2020 and what I think will happen in the future. So the biggest thing that happened in 2020 in terms of investing so far, was definitely the coronavirus, right? Coronavirus hit the US really bad in March, actually hit the markets in March. And we went into a bear market in the stock market and then pretty much a V-shape bounce back. It took about, I don’t know, a month and a half or so, or two months, and then after that, we were off to the races, going much higher. Overall for the year, markets didn’t do that much, but it dropped 20% and then came back. So that’s a big deal.

In addition to the stock market, oil also took a tumble from where it was trading. And then there were a lot of headlines in April, lots of headlines, all the news going crazy, oil went negative, oil went negative, oil prices are actually below zero. You can get paid to get oil. And of course, that’s a bunch of BS. So let me put some, let me talk about it. Let me explain it. The spot price of oil, which is the actual real price of oil if you were to go buy a barrel of oil, it’s the spot price, that’s how much you can buy it for. That never went below zero. Never, ever and it hasn’t happened, will never happen, because oil is a commodity. It is a physical substance that has cost, right? It is worth something and it has a cost to locate it, to drill it, to get it out of the ground, to transport it, insure it, store it, all that stuff.

It costs money to do all that right now in the US, in the shale, it takes about, I don’t know, $40, $45, $40 to $45, depending on the company, somewhere in that range, to get the oil out of the ground. If you go over to Saudi Arabia, they’re drilling it. Their oil is a little bit easier to extract and so their costs are cheaper, probably somewhere at $12 to $15 per barrel, somewhere around that range, but still it costs money. And so no, there was never a time where anybody could go into the market and get paid to buy oil. So let’s put that to rest. And if you look at a chart of oil right now, you will see it never went oil. And when I talk about oil, there are different types of oil. The one that went negative supposedly was called WTI and that is the one that we trade in our program.

The other type of oil, which is traded in the United States, is Brent. And Brent oil itself never went, even trading wise, never went below $26 or so a barrel. That is the oil that is used, the crude oil that you get from overseas, the Middle East and such. But in reality, there are dozens and dozens of types of different crude oil. So the ones we trade mostly are WTI, and you can also do Brent in our program. We trade WTI. WTI is the one that is pumped in the United States or drilled in the United States and in Canada. And all of that oil makes its way normally through pipelines and gets to a place or city called Cushing, Oklahoma. That is where they are stored. That’s where all the oil is stored. That’s WTI, that’s the one we trade. So a lot of times, if there is some unease in the Middle East or something like that, it impacts Brent a lot more. It does impact WTI a little bit, but it’s not to the same degree.

So WTI is a little bit more stable in that sense. There’s less risk of an attack or something like that really making WTI go nuts. But if something happens to Brent, WTI does move in tandem, so that’s a whole different story. But what happened was, the trading in WTI for one day did go negative. It did. And that was what the headlines were talking about. It’s not that the spot price was negative. It never was. It was for one day. Basically what happened is that we have this very large oil ETF, ticker symbol, USO. If you want to trade oil, but you cannot trade futures, like if you’re a mutual fund or a hedge fund or whatever index fund type thing, if you cannot trade futures, they created this ETF, which tracks oil prices and it’s called USO.

Now in order… The way they do that is they buy front month oil futures contracts. Now oil is traded as a future, which means it’s a contract and it has an expiration date, just like the options. So you can have a option on a future. So you have an option, which is a derivative and then oil contract futures contract, which is also a derivative. So you have a derivative on top of a derivative on top of oil. Seriously, I’m not trying to lose you. I know it’s getting a little complicated here, but really I’m not trying to. I’m trying to make it as simple as possible. So anyway, you have USO. They buy front month futures contracts, and you can, futures contracts go for several months. So you can buy one for now or in the future. That’s why they’re called futures and the prices are different for all of them. They’re all individual, different securities. So they only buy the front month.

What happens is every month when they get to expiration day, the USO has to sell all of its futures contracts, and then they have to buy the contracts for the next month. So basically, they just roll it forward. They do not own any oil, right? So there’s another ETF GLD, which tracks gold. Now GLD actually owns gold. So they have gold stored. They don’t have to play this game. Maybe they do a little bit, but not as much. USO doesn’t own any oil. They don’t store any oil, so they have to play this game with trading. Now, what was going on is, that oil was decreasing in price because there is a lot of supply. There is a ton of supply right now, and there’s a lack of demand, because of the Corona. It was totally unpredicted, markets shut down, country shut down, business shut down, everything shut down. Nobody needs as much oil. And so what happened was, that the drillers are still drilling oil, but now nobody’s using the oil and nobody’s buying the oil.

So the oil was being stored in Cushing, Oklahoma and the storage facilities were getting fuller and fuller and fuller. They were roughly at about 80 or 85% capacity. Okay. Now, if you want to store oil in Cushing, Oklahoma, you have to have a contract, you have to have a deal with them. You can’t just walk in and say, I need a billion barrels of storage or whatnot. You can’t just do that. You have to have an agreement with them in place. So you have an entity and you have a trader, USO, which has thousands and thousands and thousands of contracts that they have to get out of. They have to sell, right? And it’s expiration date, so they got to sell them today. They got to sell them on that day. They don’t have a choice. Otherwise, they go bankrupt. They go caput. They cannot take delivery of that oil. They can’t. So they have to get rid of the contracts.

Who do they sell the contracts to? They can only sell them to people who have capacity to store it, right? You, me, any individual trader, we cannot take delivery of oil. So we do not trade on expiration day. We do not take contracts, our brokers will not let us. It’s just not done because you cannot take delivery. Only people who taking delivery are trading on expiration day. And those were the only people who could buy these contracts from USO. Now, normally in a common market, normal market, everything happening, people take those contracts and it’s a done deal. It’s normal. But, this was not normal. Nobody knew what was going to happen with Corona. Nobody knew when demand was going to pick up again.

And so what happened was, all of the buyers that USO normally deals with, they know these guys, they’re friends, they work together. They reach out to them and say, “Hey, we need you to take over these contracts from us.” The buyer said, “No, can’t do it. Not going to do it this month. I still got plenty of oil stored up that I haven’t gotten rid of. My capacity is low. I don’t have that much allotment. I can’t do it.” And USO freaked out. So they said, “All right, fine, I know the price is whatever, 30 bucks a barrel, $25 a barrel, $25 a barrel,” whatever it was, said, “I’ll give it you for $20. Just take it for $20.” And the buyer said, “Nope.” “All right, I’ll give it to you for $15.” “Nope.” “I’ll give it to you for $10.” “Nope.” “I’ll give to you for zero. Come on. Just take it, just take it. Just please just take my oil. Just pay me and just take it from me. Just take these contracts.” “Nope. I can’t take it because I got nowhere to put it.”

“So even if you give me the oil at zero, what you’re doing, Mr. USO, I cannot take delivery. It’s going to cost me to take delivery of this oil. I have to pay for storage.” “How much is it going to cost you?” “Well, I don’t know. It’s going to cost me some money.” So USO kept dropping the price. They went to zero and then they went negative. They said, “Here, we’ll pay you to take the oil.” “Nope.” “We’ll pay you more. We’ll pay you more. We’ll pay you more.” I think it got down to, at one point, it was like negative $35 or $37 a barrel at one point. That is what they were paying these people to take contracts from them and then take delivery and store it.

So we as individual investors, or most people on Wall Street, could not take advantage of this. There were only a few select firms that could have taken advantage of this. So for them, yeah, it was a windfall, right? For us, you and me, it didn’t make any difference. For oil traders or option traders, it didn’t make any difference. Why? Because number one, oil options had already expired. The options that we were trading had already expired. And because of the rules that we use in my system, we were already out of the oil markets. We were not trading at this time. So that saved us. The rules and my system, it worked, this is proof. It worked and it saved us and we were not trading at this time. Number two, the day after this happened, oil prices went back up, because this was a anomaly. It was a technical glitch in the system. It was just supply and demand. No demand, prices go down. Hey, I need you to get rid of this, here, please take it. So they got paid.

Everybody could not take advantage of this. This is not a normal thing that happened. If you look at the price of a price chart, you won’t see it on the price chart. And that was gone. That only happened that one day for that one futures contract. Not all of futures contracts, not olive oil. It was that one futures contract on one day and it expired and it went away and the problem was gone. Now I hope USO has learned its lesson. And they did say that they do not, where they were spreading their risk into not trading only the front month option. So now they trade whatever the current month is, they buy some of the next month, they buy some of the next month. That’s going to lower their profits and that’s going to lower how much USO actually tracks the regular price of oil. So if oil is going up a dollar, USO’s not going to go up the same amount because it’s not going to track as much, because they’re in different contracts.

So getting technical here. So just USO is not going to be as efficient tracking the price of oil because now they have to hedge themselves. They have to protect themselves so this does not happen again. Okay? But, so if you’re going to ask me, “Hey, did oil prices go negative?” I’d be like, “Not really.” Oil never went negative. Technically there was a glitch. If you could have taken advantage of it, you did well. Most of us couldn’t. Next thing you know, oil was up the next day, right? And it started going up since then. So what happened? Well, this was a pretty big anomaly, a pretty big glitch. And even before this happened, liquidity, or not liquidity, volatility in oil had increased. And so if you look at OVX, which is the oil volatility index, it’s like VIX, you know the VIX for stocks, the SS&P, OVX is the same thing for oil.

If you look at that, volatility had increased before this happened, before April 2nd, I believe. And so the, the brokers themselves, the futures brokers, when volatility increases, they start to increase the amount of margin that you need per each contract. So basically what that means is, that things are getting crazy. Things are getting volatile. The market is waking up, it’s jumping around, you need to have more money for each contract, which means that you are being protected, right? You’re having less money at risk. If you only have $5,000 in the account, you can’t be trading two, three, four different contracts. It lowers how many contracts you can trade. So you have to get out of some contracts, which is good because things are acting crazy.

That’s one of the ways the futures markets protect their traders, us little guys. After this happened, several brokers decided to stop letting individual investors trade oil. That was oil, as well as the options. Was this fair? I don’t know. I’m not a broker. I really can’t decide. I can’t say. But I do know that if you were at a broker that did not, and all the brokers did not. There were several brokers, interactive brokers, trade station, DeCarley trading, which is somebody that we recommend. They are a futures only broker and all the other futures only brokers did not stop trading. If you could have traded, and I could not. I was at Ameritrade, Ameritrade stock trading. A lot of the other big firms stopped trading, E-Trade, Schwab, they all, they stopped it. So I could not take advantage. But you have a security that has just gone down in price significantly. It’s lower than the cost, right? Oil is trading at a price that’s lower than it costs to create.

What is going to go happen to that price? It’s going to shoot up. It has no choice. It has to go up. That was the easiest money you could have made ever in the history of the world, maybe. You have things selling and I think if you look at our oil chart now, the lowest they got to was like $6 on the oil chart, right? But let’s say it went to $7 or $8. Let’s say you could have bought it at $8. If you could buy oil at $8 and it cost $40 to get out of the ground, yeah, that sucker’s going to go up. That’s easy money. So yeah, we did have people in our program that were trading and they made the easiest money in their lives because you know it’s going up, right? You just sit back and buy as much as you can and you hold on for dear life.

And since then, that happened in April, right, and oil has rallied. It’s been trading for the last several months around $40 a barrel. And it’s in a very tight range. It just goes up and down a little bit, little up and down, up and down, up and down. I have been gritting my teeth waiting for Ameritrade to let us back in. They still haven’t done it. I’m recording this, it’s November, they still have not let us back in as individual investors. Other brokers have and so I had to switch an account to another broker and now I’m trading it over there. I waited and waited and waited, and finally said, I can’t take it anymore. I mean, this is the perfect opportunity to be trading oil. It’s calm, it’s moving sideways. Oh my God, it’s easy. Money is just sitting there. Please, let me trade. Please, let me trade. Nope. They’re not letting me. Okay, let’s go to a different broker.

So I took out a large account over to another broker and I’ve started over there. Two months ago, I started, made 7% in the first month. This month I made like two point something. I got out early because of the election. The US presidential election’s coming up in a few days and I have really limited all my positions. I don’t want to be in any oil positions. I don’t think anything’s going to happen to oil because of that, but I’m not taking the risk. Okay? So yes we are back. Oil is back. It is a great way to trade. It is doing really, really well. I mean, it’s going sideways. I don’t know what else you could want is to be an option seller, right? Very little risk, sell as far away from the money as you can. It’s great if you do it properly. And the way we do it is, we do it properly, right? Because we have, back-tested, not back-tested, but actually tested with real money. I have for several years.

Different strategies, I found the one that works the best and not only does it work the best, but I came up with the different rules to protect myself and to hedge myself and to make sure that, okay, in this situation, we need to do this, in this situation, we need to do that and that’s why we were protected. That’s why we were out of the market even before oil went, quote unquote, negative for the day, right? We were already out. And that was because of our rules. So we were protected. So I’m happy, I’m ecstatic. I’m like, Hey, this is it. It worked. This is why we have the freaking rules to protect ourselves. This is why I can say, yes, this program works. And this is why I say you should join the program, right? You should join if you want to trade oil profitably. Yeah, join the program.

If not, you can try to figure it out on your own. Good luck, it took me several years to do it. Have at it, be fun, hopefully you don’t lose all your money in the process. But yeah, so that’s where oil is right now. It’s moving sideways. It’s doing good. We’re going to be making money. I’m waiting until after the election is over and then we’re going to go full fledge back into it. Been already doing it for two months now and we did great, very simple, very easy trades. After the election settles, everything goes back, we’re going to go 100% back into it and it’s going to be a lot of fun. I do expect oil to be very calm for the next year. We’ll see how it happens. We’ll see if there’s anything with the Corona vaccine and all that stuff. We can’t predict the future, but from what we are seeing, we’re going to make a lot of money.


So if you’ve been thinking about our program, it’s time to get in now so that you can start paper trading, so that you can start practicing and so you stop wasting time, right? Because every day that goes by is a day that you’re missing out on theta, missing out on this money for selling time. Every day that goes by is a day you cannot sell time. So stop sitting on the sidelines, get involved, start paper trading, doing something, and trade with the odds in your favor. Thank you and good luck.



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