Oil plunges to lowest prices in decades on economic, storage concerns

Yahoo Finance’s Brian Sozzi and Alexis Christoforous speak with RJO Futures Senior Market Strategist John Caruso about the oil market turmoil.

Video Transcript

ALEXIS CHRISTOFOROUS: Stocks are lower this morning as crude oil crashes to a 21-year low, plunging to its lowest level there in decades as demand shrinks and those OPEC plus cuts we've been talking about don't seem to be having the desired effect on the market.

Here to talk more about oil with us is John Caruso. He is Senior Market Strategist at RJO Futures. John, good to see you again. I mean, with crude oil near $10 a barrel, I mean, how low are we going to go? Some people are talking about negative oil.

JOHN CARUSO: I'll tell you what. I think your last guest that was on was 100% accurate. I do think this is a little bit of a bottoming process that's taking place right now on the May contract. If you look at the forward contracts, you've got a roughly 100% premium to roll from May into June this morning, with the May contract obviously expiring today. So to be honest with you, with the super contango that we're seeing the market in right now, I think it makes investing in oil, especially the oil futures over the long haul, very, very difficult to do.

I do think this is a little bit of a bottoming process here. But as a trader, I think you still have to look at selling rallies in the forward contracts until we do see the economy start to show some signs of life and things come back to normal, which could be very, very difficult to do. It's going to be even more difficult to try to forecast what demand is going to look like three months from now, six months from now, even a year from now.

BRIAN SOZZI: John, for the average investor out there, can you help us-- can you help explain what precisely is happening? Is it just that there's just way too much inventory?

JOHN CARUSO: Yeah, absolutely. I mean, the market right now-- I mean, what we've seen on the demand side of the market has been completely unprecedented. We're losing 25 to 30 million barrels a day that's come offline since the onset of the virus. There was also a rumor that Saudi Aramco just ahead of the March production cuts actually did send a large shipment of crude oil to the United States that has yet to hit the market, and you might be seeing that being priced into the May contract right now as we speak. You know, the 9.7 million barrel cut by OPEC, yes, it's a record cut, but there's nothing you can do to offset the 25 million barrels a day that are coming offline due to the virus.

ALEXIS CHRISTOFOROUS: So, John, with oil this low-- I mean, down 35% here-- what does it mean for some of these oil producers? Is it just that we're going to have to see some of them not survive this because they just can't-- they can't hang around with oil this low?

JOHN CARUSO: You're absolutely right. You know, it's-- you know, we've already seen a couple companies that have had-- they've filed bankruptcies over the last week. I think it's going to be very, very difficult for a lot of these United States oil drillers to actually survive this scenario. I know that the US government was also talking an unprecedented situation where they would actually pay producers to leave their oil in the ground unproduced for the United States government to take delivery on going out some months. So, you know, that's a scenario that could potentially play out, and I think it's probably a last-case scenario for the United States government.

BRIAN SOZZI: John, a very important point there. Do you think the selling, not just so much in crude oil but crude-oil-related stocks and the producers, that won't stop until the government does step in here and come up with some form of relief plan for the sector?

JOHN CARUSO: I think that's partially accurate. You will certainly see a relief rally if we do-- you do see the US government take action. However, you know, I think the name of the game here is the demand side of the market. You need to see demand come back.

Again, we're seeing some unprecedented times right now with the demand destruction that we've seen. You know, I know the president has been talking about rolling the economy back out in phases. I do think once the May contract goes off the board and we start moving into June and July you are going to see a steady uptick in the market. However, we're certainly still not out of the woods.

As your last guest mentioned, I do think that, you know, bottoms are a process, and it could take two, three, four months for us to actually, you know, find some stable ground in that market.

ALEXIS CHRISTOFOROUS: And lastly, what about the effect on gas prices? I mean, I filled up this weekend. I'm not going much of anywhere, but I had to fill up my tank, and I spent $1.85 a gallon. I mean, that is insane. I don't remember the last time I did that. So I guess the silver lining here is that gas prices are so low, but the problem here is that there is no demand because none of us can move about freely.

JOHN CARUSO: Absolutely. There's no demand for the market right now. So you can charge $0.50 a gallon, and if people aren't driving to work and they're not taking road trips and they're not taking trips to the store, you know, it's just there's no demand out there. So it really doesn't matter what the price of gasoline is. If I'm filling my-- I used to fill my tank up in the gas-- or my gas tank up, you know, probably once every two days. Now here I am once every two weeks because, you know, here we are sitting-- you know, sitting at home, and you've got the demand destruction of the market that it's just not coming back online.

ALEXIS CHRISTOFOROUS: It is incredible times. John Caruso, senior market strategist at RJO Futures, thanks for your thoughts on oil today.

JOHN CARUSO: Thank you.