Oil prices crashed… what does that mean?

Apr 24, 2020

On this week’s show, we will discuss two important events within the current market environment. Oil prices crashed yesterday, even below $0/barrel at one point. I’ll explain what that means. Additionally, we will discuss the importance of the VIX and why we are paying attention to the volatility index

You May Read the Transcript Below:

Hello, everyone, welcome to this week’s edition of retiring Minnesota nice. The goal here is really simple. It’s to provide timely, succinct information around your retirement, your invest your investments, and your overall financial well being. My name is Matt Gulbransen, I’ll be your host and navigating you through these timely podcasts as we go forward. This week, I wanted to talk about two things that are impacting the markets today. One, although it didn’t really come out of nowhere, what we’re seeing across headlines is oil prices plunging literally plunging to zero and actually going negative. So I’ll talk about exactly what that means here in a second and, and really how that has a larger impact on the overall global financial system, commodities as a whole and just what to expect there going forward. Number two, I’m going to talk a little bit about something we call the VIX, the V x. This is the volatility index. You see most People don’t really pay a whole lot of attention to the volatility index until we hit these major market corrections and start to see this, this level spike extremely. And now it becomes a very front and center metric to view health within our financial markets. So first, let’s talk about the oil market. So if you’re like many of us, we didn’t really realize that oil prices could actually go negative in terms of the futures market. So yesterday on April 20, we saw just after lunch, oil, basically made delivery, which basically means you take possession of oil in the month of May you take possession of each barrel that you buy on that contract actually went negative. So what that means is that producers actually needed to pay you to take that oil off of their hands. Now, what happened here is that back in late February, Russia and Saudi Arabia decided that they wanted to have a bit of a A spat when it comes to oil production. And so they both decided to flood the market and overwhelm us with tons of additional oil production. And then you throw that on top of a global pandemic. And now supply has really outweighed demand dramatically. And thus we’ve seen oil prices crash. So what I’ve read is that when you look across the United States, 40% of oil consumption is within just simply cars and trucks that day to day driving and transportation that most of us are used to on a regular basis with most of the country and locked down right now my hunch is we’re only using a fraction of that particular 40%. And so what we’ve seen is that the the oil producing countries have actually now created a surplus of nearly 29 million barrels per day. So we have a huge amount of supply out there and quite frankly, you know, oil barrels are big and when you throw millions upon millions of them out there, there’s just no place to put them. Most of the world’s shipping tankers that can typically hold millions of barrels. They’re full. Most of the countries that have oil production and storage facilities, therefore, our National River reserves are filling up. And so we’re starting to see a problem arise in this this area. And that’s why we saw oil prices go negative. So I think what we’re really starting to see here is that it’s really a tug of war match in the whole energy world and who is going to lead us through the next decade, this really is going to have a lasting effect. Because if you think about it, countries like Venezuela, you think about other producing countries like Saudi Arabia, Kuwait, really a lot of the Middle East, but even some lesser known countries out there like Norway, for example. These countries produce a ton of oil. It’s a huge portion, a huge part of their local economy. But in many cases, it’s extremely expensive for them to extract that production out. So we need minimum Soil prices and maybe $30 or higher for this to actually work. And so what we may see is really a lot of what I would call, you know, middle of the road countries have huge issues from that. So what we need to do as investors is really just kind of pay attention to what’s happening out there right now, and understand that this pandemic really has so many trickle down effects. And it’s amazing how global supply chains can literally be disrupted to this level of depth this quickly. So thankfully, the US economy the market that we depend on the most to, to thrive and prosper, does not rely on energy as much as many others. In fact, energy reliance within our GDP has been going below 10% over the last couple of years. Obviously there’s states like North Dakota, Texas come to mind that will heavily be impacted by this. But by and large, the US economy will be resilient. So And I’d love to update you more on that in the future. Number two is the VIX the volatility index. This essentially measures it’s a metric used to determine the anticipated stock market volatility over the next 30 days. So what typically happens is that when the markets start to become more volatile, the VIX will spike. Thus, when the VIX number gets higher, the swings that we see in the market, both higher and lower start to become wider, more violent, more Swift. So if you think about it, back in February and March, we experienced the fastest 30% correction in the history of the stock market, all the while the VIX index spiked over 300% in a matter of two weeks. So why I’m talking to you about this is that the VIX this metric is used in many calculations to determine how companies or businesses or just portfolio managers hedge their portfolio. It increases the amount of collateral needed when someone places a trade. This is much like view this is like going in and buying a down payment on a house. And when times get tougher banks or institutions are going to require more money down in order to borrow against that, well in the world of hedging markets, is that when volatility spikes, the the banks, the institutions that are borrowing money are going to require larger collateral basis in order to support that volatility.

So, volatility has went back down since the height of the end of March. And now we’re starting to see it spike a little bit. Again, in the last couple sessions. This is something that we are watching very, very closely. So that being said, markets continue to get complicated. Markets continue to surprise us with new ideas, new new developments and how things play out that the carnage will be further but doesn’t necessarily mean the markets are going to go down. So with that being said, we’re here to educate you. We’re here to help. I hope this is a value. Take care everyone. Have a good week.

Investment advisory services offered through Pine Grove Financial Group, an SEC Registered Investment Advisor.

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