Epic crash

You can make a lot of money if your house has the capacity to store oil these days!😇 

You see, you could be paid for about $40 dollars to buy a barrel of oil early this week. So if you could store it for a while and sell it later when the oil price return to its sanity, you can make tons of money, right?!

This is indeed an epic crash no one has ever seen before: the oil price dropped below zero to as low as minus $37 per barrel. Of course by now, this is not news anymore, but history. But not sure many people really know how this started. Here is the story I heard:   An oil trading firm in Singapore, Hin Leong, kicked off oil's trouble. Hin Leong buys and sells large super tankers filled with physical oil to distribute through Asia. Sunday night, it told the world it had a non-disclosed $800 million loss from trading oil. To cover the loss, it had to liquidate oil futures – a fire sale. It had to sell…Then the chain reaction started! Everyone else saw that someone was in trouble and backed away from buying the contracts, betting they could wait for a lower and lower price. They saw someone "in trouble" – someone who had to ditch their contracts – because they expired on Tuesday. In the future market, it is no joke to buy and hold something till maturity. A physical delivery will follow. So unless you truly have a storage to keep the oil, no one wants to get the oil delivered to them: each contract means 1000 barrels of oil!  That's why everyone wanted to offload their future contracts that expired on Tue this week, at any cost! May futures were trading around $14 at 6 a.m. Monday. Around 2 p.m., the price fell to just pennies. Within an hour after that, nearly -$40. Negative. For the first time ever in the history of oil futures trading, since it started in 1983. A 300%-plus drop in oil in one day!!😵

So what will happens when oil is in this unprecedented collapse never seen before? Two major consequences:

For one, a huge number of oil producers will go belly up. Per estimate,   at $20 per barrel of oil, more than 500 American producers will go under by 2021.  At $10, the number swells to more than 1,000... 

When the whole world is virtually ground to halt with no demand for oil while the supply is abundant, you can bet the oil price will remain low for quite some time. We probably will see it at $10-20 or even lower in the months ahead. So be prepared for a surge of oil company bankruptcy in the near future!!

The next major result of this epic oil crash is a creation of a bullish trend for VLCCs. Before I tell you what it is, think about for a minute. Where all the oil extracted from the earth will go, when no one is using it but it is kept being produced? You must have somewhere to store it, right? The thing is all the regular storage facilities have already been overwhelmed by the extremely high volumes of oil coming in every day. The world is basically not having enough storage room for oil now, period! That's exactly what had caused the epic oil crash on Monday to push it down to negative as everyone was afraid to get oil with no where to store it. But ironically, this big headache for oil traders is music to ear for a special group of businessmen, the owners of VLCCs, standing for "Very Large Crude Carriers". They are the largest oil tankers and can carry 2 million barrels of oil. So nowadays, if you can go out to oceans, you will see many such VLCCs floating out there, full of the black gunk in it. They basically have become the floating oil storage. Of course, they won't do this for free. Rather, they charge insanely high prices for the services. Here is the rate I have seen:

Tanker Rates by Ship Class

	2019 YTD	2020 YTD	Previous Week	Last Week
VLCC	25.6	103.8	175.4	185.7
Suezmax	22.1	59.5	69.0	74.8
Aframax	18.1	44.4	39.2	38.8
Pmax^	18.5	48.5	20.5	22.0
LR2	19.3	35.9	60.9	86.0
LR1	14.7	26.8	49.0	59.5
MR	14.7	22.2	22.1	26.1
Index*	20.3	65.2	97.7	105.1

Tanker rates- Single Voyages in US$ k/d

  * = segment weighted average 

 ^ =based on Caribs/US route only 

So basically VLCCs can charge about $200,000 just for one day of storage but this is something not just for days, but likely for months or even longer. Prior to this crisis, the VLCC rate was just about $40,000 per day. So the VLCC companies are making a killing as the result of this oil historical crisis! 

I luckily shared this idea about a month ago with my Family and it has already shot up about 70%. Of course, this is a very risky sector to trade as it is quite volatile, sensitive to headline news in either directions. At the moment, the market has probably priced in a a lot of its bullish fundamentals. I don't think it is a good idea to chase from here.

As we often hear, crisis always carries opportunity. So whenever something devastating hits, don't just be stunned and panicky. Instead, try to think out of the box and look at issues from different perspectives to see if something good can come out of the crisis.  😇