Collapsing oil prices may be a warning sign of what’s yet to come for the economy, says one energy expert.
“I think oil is telling the story that some of the worst effects of coronavirus on the economy may yet come,” Dan Dicker, founder of The Energy Word, tells Yahoo Finance.
“That oil should fall off the table and actually go negative ... is a sign of what's going on in the economy at large,” he added.
On Monday the price for WTI (CL=F) May futures expiring April 21 collapsed below zero for the first time in history. Oil producers were paying buyers to take crude off their hands as storage capacity is full and economies are at a standstill due to COVID-19. The commodity sell-off continued on Tuesday into U.S. crude futures for June delivery (CLM20.NYM) raising concerns that those contracts could also go negative.
“You’re looking at a replay of this in 30 days, provided there’s no magical solution on either the oil side or the coronavirus side,” said Dicker. “But other than that, yep, I think you're looking at that death march again next month.”
OPEC members and their allies recently announced a production cut of 9.7 million barrels a day to help prop up prices. Analysts point out those cuts won’t start until May — and are not enough to offset the collapse in demand.
‘Optimism that's going around right now about this economy restarting is just a major fantasy’
“Unless something magical happens, I think that the optimism that's going around right now about this economy restarting is just a major fantasy,” says Dicker.
He highlights countless examples of how low oil prices will effect the economy. One of them is lower gasoline consumption.
“All of a sudden people don't need their cars as much and people who had a second car, they want to sell that second car,” says Dicker. “And if you've got 20% on employment, on top of that now you've got a whole bunch of leases, maybe 10 [million] or 15 million leases that have a possibility of default. Now you have a problem with banks.”
‘You’re nuts if you play this stuff right now, you should probably stay the heck away’
Dicker says retail investors should stay away from oil for now. “You’re nuts if you play this stuff right now, you should probably stay the heck away.”
On Tuesday, Goldman Sachs told investors to expect a “violent rebalancing” for oil in the coming weeks, warning price volatility will remain high in the near term.
We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!
— Donald J. Trump (@realDonaldTrump) April 21, 2020
U.S. Energy Secretary Dan Brouillette said on Tuesday he will urge house lawmakers to buy oil for the country’s strategic reserve.
Ines covers the U.S. stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre