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How to Profit From the Crude Oil Crash
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Hi there...
On April 20th, crude oil futures for the May 2020 contract went negative to the tune of -$38 a barrel.
That meant you could have been paid $38,000 to take delivery of 1,000 barrels of oil – the size of a crude oil contract on the New York Mercantile Exchange (NYMEX).
Of course, you would have first needed a place to store all that oil... And good luck with that.
Then, you would have been in position to sell it all for June delivery for even more money, about $17,000 more, based on current June 2020 crude contracts (about $17/barrel).
Right now, it’s hard to find a place store crude at any price.
That’s because – as you undoubtedly know – there’s a worldwide supply glut in the commodity the likes of which has never been seen before.
In fact, before April 20, there had never been a negative price for crude in the history of NYMEX.
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As a result of the oil glut, most of the world’s oil storage facilities are filling to the brim.
This of course is largely due to everyone's being forced to "shelter in place" to combat the coronavirus pandemic.
Who needs gas when there’s nowhere to drive to?
Almost all the restaurants, bars and sports venues are closed…
Most of the world’s beaches, parks and businesses are closed as well…
As for commuting to work, that’s no longer possible for most of us.
That’s because – unless you pack groceries for a living or hold some other job deemed “essential” – you’re either working at home or unemployed because governments have shut down most on-site business activities.
As for flying, who wants to enter an airport during a pandemic, let alone breathe re-circulated airplane air for hours?
Besides, anything you’d want to see as a tourist – parks, monuments, museums, performances – has almost certainly shut down.
As a result of all these restrictions and the general fear of contracting the coronavirus, air travel is down 96%. Obviously, that’s decimated demand for jet fuel.
As if that weren’t bad enough for the oil industry, in March Saudi Arabia cranked up production of crude by 26.8% - from 9.7 million to 12.3 million barrels of oil per day – in an effort to strong-arm Russia into agreeing to production cuts.
Result – the world got flooded with even more unwanted crude.
And now we’ve virtually run out of land-based storage facilities.
Enter the "very large crude carrier" or VLCC.
These are giant tankers – water-borne behemoths that can hold at least 2 million barrels of oil.
Since demand for fossil fuels has fallen off a cliff, there’s little need for these tankers to perform their primary function – transporting crude oil from oil wells to refineries.
But there IS record demand for using these ships to store crude.
Under normal circumstances, about 25 of the world’s 850 VLCCs are used for this purpose at any given time, at cost of about $40,000 a day.
But now?
About 125 VLCCs have been rented out to store crude, according to Lois Zabrocky, CEO of International Seaways (INSW), one of the players in the industry.
As a result of this explosion in demand, the daily cost of storing oil short-term on a VLCC hit a record high of $229,000, according to Clarksons Platou Securities.
Rates for hiring a VLCC for longer-term contracts have also skyrocketed.
For example, industry sources report that one European oil major was leasing a 12-year-old tanker for $120,000 a day.
Obviously, all this demand of sea-based crude storage is creating a windfall for oil tanker companies.
After putting in an intraday low of $14.89 on March 19th, the stock climbed 82%.
Other companies in the tanker space are also up significantly.
These include Frontline (FRO), which has risen 72% in that time frame, and Scorpio Tanker (STNG), which is up an astounding 113%.
Any of those three companies are good plays for short-term profits right now, in my opinion.
But of the three, I like INSW best.
For one, it used a recent industry-wide downturn to acquire newer vessels and sell off older ones.
It also sold some non-core assets, (primarily a liquid natural gas or LNG joint venture) and used the proceeds to pay down debt.
And most importantly, it’s well-positioned to capitalize on a new environmental regulation, IMO 2020.
That regulation caps the amount of sulfur seagoing vessels may emit from the fuel they burn.
Companies will either start using cleaner, more expensive fuel or they’ll have to install “scrubbers” that remove the excess sulfur from a ship’s emissions.
Most VLCCs don’t have these scrubbers… but INSW ships do. That gives the company a huge competitive advantage, which will come into play once demand for crude oil picks up.
And you can bet that it will at some point, as the world is not about to be free from reliance on fossil fuel any time soon.
So you’re looking for a trade that could make you a quick, tidy profit, consider International Seaways.
Better still, consider buying the September 20 Strike Call Option.
As of Tuesday, April 28th, the mean price between the bid and the ask was $10.10.
International Seaways is a smart way to play a historic disruption in the oil markets.
And if you haven't saved a seat in the investor training Chris Rowe is holding today at 1PM EST...
You'd be very smart to [go here now]( and grab one.
Chris is going to talk about a little-known strategy that lets you pull cash out of a position without having to sell shares of stock.
Trust me, you don't want to miss this.
That’s all I have for now.
Until next time,
Doug Fogel
Editor, True Market Insiders
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DISCLAIMER
The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. True Market Insiders LLC is not an investment advisor and is not licensed to give specific financial advice. The chairman of True Market Insiders, Chris Rowe, is also the CEO, CIO and owner of Rowe Wealth Management LLC, which is not owned by and is not the owner of True Market Insiders.
Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable (“information providers”). However, such information has not been verified by True Market Insiders or the information provider and TMM and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. TMM and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.
Unless otherwise stated, performance numbers are based on pure price returns, not inclusive of dividends, fees, or other expenses. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy’s investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs.
The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
Some performance information presented is the result of back-tested performance. Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to illustrate the effects of the True Market Insiders LLC strategy during a specific period. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.
Back-tested performance results have certain limitations. Such results do not represent the impact of material economic and market factors might have on an investor’s decision making process if the investors were actually managing money. Back-testing performance also differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight. True Market Insiders believes the data used in the testing to be from credible, reliable sources, however; True Market Insiders makes no representation or warranties of any kind as to the accuracy of such data. All available data representing the full platform of investment options is used for testing purposes.