Today’s trade was an Oil May contract with a sell order from a price of $11.69. A crazy confluence of unprecedented events occured to create the greatest, most profitable epic trade in the history of the Oil Market. Oil had closed on Friday at a price of $18.00 but as soon as markets opened Sunday afternoon it was a continuous downward trend until the exchanges opened on Monday morning when the drop accelerated.
These events all started a couple of months ago when Saudi Arabia tried to convene a meeting of Opec with Russia to agree on a production cut to try to stabilize Oil prices. Russia refused to attend the meeting and thereby would not be considering to cut back their output, so Saudi Arabia canceled the meeting and the price war began. The Saudi’s decided to increase their output and thus there was no chance of the Oil price climbing higher.
Then the Covid-19 virus started to spread around the entire world until it became the global pandemic it is today. This has caused the entire world to basically stop working except for essential services and with everyone under stay-at-home orders there is no need to buy gas to drive anywhere. Airlines and other major buyers of Oil and Oil products have also stopped their purchases as they are almost entirely shut down. This lowered demand has added to downward pressure on Oil prices since there has been no cut in production.
The next factor that prompted the unprecedented sell off in Oil futures is that Oil is traded in different contract months and the current contract is for the month of May. But the May contract for Oil futures is set to expire at 11:30 am PST on Tuesday April 21. Most big traders and hedge funds exited their trades last week or earlier to start trading the June Oil contract. That left a very thin market of only a fraction of the usual volume trading the May Oil contract which increases volatility. The final day of an Oil contract is not a very active trading day as it is completely over in the middle of the day so the last active day is usually the day before. But when that contract expires and if you are still in possession of an Oil contract then you are obligated to take the physical delivery of that contract. One contract is 100 barrels of Oil, so you are going to need somewhere to keep that Oil.
That’s where the final event that caused today’s sell off comes into play and that is the storage capacity for Oil. Since the demand for Oil has cratered, there is now an oversupply as producers are still pumping Oil as it is expensive or could damage a rig to stop production. Now this Oil needs to be stored somewhere and the main spot in the U.S. is in Cushing, Oklahoma where they have been saying that at the current rate of production, their storage capacity will be full by the end of May. In fact, the spare space that they do have may not even be available because it has possibly already been spoken for by some companies.
All of that led us to today when the price of Oil went into negative territory for the first time ever since the current Oil futures trading market was started in 1983. The price of Oil was already under pressure when Saudi Arabia and Russia decided to have a price war to oversupply the market and keep prices down to retake market share from U.S. producers as they go out of business. The Covid-19 pandemic hit and crushed demand putting more downward pressure on Oil prices and storage facilities are nearing capacity in the U.S. and with the May Oil contract expiring imminently nobody wants to be left holding contracts. Traders on Monday knew that by putting downward pressure on the price of Oil by selling futures contracts there would be nobody to stop them from pushing Oil to a massive unprecedented move into negative territory and they would reap huge gains. That is how the price plunged to a low of -$40.32 as the market closed at it’s set daily time of 11:30 am PST when exchange floors would usually stop trading Oil futures contracts.
The trade that I started with today was a sell order for an Oil May contract from a price of $11.69. The price had just tested a low of $11.00 and was now retracing to just over $12.00 with eight consecutive green bars followed by a long red top spiked bar that closed at its low. That is our entry point of our first contract.
The price continued moving in a downward trading range between $11.00 and $10.01 which is touched multiple times from 7:00 am PST to 9:00 am PST until it finally broke down through the major support/resistance level of the white line at a price of 10.00.
It was at this point with no end in sight on how low prices could go knowing that there were no major buyers to stop the trend from most likely hitting zero that I added another contract to my short position from a price of $9.99.
From there it was just a matter of moving my buy stop down along the top of the PSAR green triangles until the time of 11:30 am PST when the price is set for the day and the next bar was pulling back and closed a higher green.
So I flatten my position at a price of -$37.21 for a profit of $96,100 in a single day in the greatest trading day in history!!!