What do you say if someone offers you a barrel of oil? No Tanks! I can almost hear you all groaning.
Life feels a little better today than a month ago. Not because it is better, but because we seem to have passed peak fear and are now letting just a little optimism seep into our outlooks. While the stock markets have stabilized – although still down from the beginning of the year – the low price of oil has been a continued concern.
The world’s crude oil is almost “homeless”…storage facilities in U.S. major crude-oil trading hub, Cushing, Oklahoma, are expected to fill up to capacity in the coming weeks.
“At least 18 Saudi-hired supertankers…due to arrive next month in the US…are ripe to be rerouted and will likely park as floating storage until a buyer emerges.” Wall Street Journal 4/21/2020
About 80 supertankers out of 750 worldwide are now used to store oil rather than transport it, according to Saudi officials. Very Large Crude Carriers (VLCCs) rates were $27k/day four weeks ago. Today, they are getting $300k/day because there’s no place to put the oil they are carrying. See image that links to the Seatrade Maritime News article.
Markets have reacted with negative prices to this worldwide glut of oil. In effect, oil producers are saying, “We will pay you to take this oil off our hands because we have no place to store it.”
Why does the historic negative oil price have such a profound effect on stock prices? Some reasons:
- Banks – that have loans to oil-related companies, will be weakened as these loans are subject to default as the oil producers suffer with below profit level prices.
- Jobs – there are many oil-related jobs that will be eliminated…adding to the largest (and quickest) U.S. unemployment stats since the Great Depression due to COVID-19.
- Sentiment – as if the Virus Crisis wasn’t enough, this oil price drop has added to the impression that the “sky is falling” and some investors sell out to avoid risk.
Our take on this oil glut is that when the government-mandated business and personal shutdown is concluded, life will begin a “new normal.” At some point oil use will gradually rise along with travel, eating out, theater attendance, and retail shopping…all with a new emphasis on personal hygiene and social distancing.
Many expect pent-up demand to buoy markets once the Virus Crisis has subsided. Buying patterns may be different…perhaps more online purchases than in brick and mortar stores.
In all this, we have found some positions in our accounts that have actually gained, and in some cases, we’ve taken profits.
In our portfolio of funds, we bought SPDR Technology Fund XLK and sold it three weeks later for an 11% gain. We expect to buy that again if/when the market drops again. In other cases, we’ve sold to eliminate liabilities in our portfolio such as Emerging Markets positions. We now have an average of 15% in cash in this portfolio to deploy at the next pullback.
In our portfolio of stocks, we bought Microsoft MSFT, Home Depot HD, and Target TGT during the pullback. All are at gains today helping the return of this portfolio beat the stock market return by several % year-to-date. We also trimmed some winners: cybersecurity firm Fortinet FTNT and video game maker Activision ATVI, and sold some losers: online travel company Booking BKNG and the Chinese Google, Baidu BIDU. We now have approximately 15% cash in this portfolio to take advantage of the next leg down.
We hope everyone is safe and sound and we look forward to the day when we can have in-person meetings once again. Until then, please let us know if we can do anything for you.
– Bruce Porter & Tim Porter, CFP®