The pain in the energy market has been garnering headlines all year, but yesterday it did so in truly unprecedented fashion. The price of oil closed in negative territory for the first time ever on Monday (-$37.63). Technically, this means that if you were a seller, you would have needed to pay someone $37.63 to take each barrel off your hands! In reality, there is a little more nuance than that. I’ll try to break it down without getting too far into the weeds.


Oil prices quoted by the media are based on derivative contracts known as futures. Oil futures represent a legal agreement to buy or sell oil at a predetermined price at a specified time in the future. At expiration, the seller delivers physical oil to the buyer. There are two primary users of these contracts:

  1. Hedgers – Producers and/or consumers of oil that want to lock in a price today for future production/consumption.
  2. Speculators – Investors that have no intention of providing/receiving physical delivery of oil, but who aim to profit from price fluctuations.

Hedgers and speculators can buy or sell contracts that settle in monthly intervals well into the future. When the financial media quotes oil prices, they are typically quoting the contract that is closest to expiring (referred to as the front month). Currently, May is the front month contract despite not being shown on the table, because it expires today. It was the May contract that made history on Monday by plunging deeply into negative territory. To help provide a visual, the table below illustrates the next five contracts that are nearest to expiry (excluding May):

Oil Futures Contracts (Source: WSJ)

What Happened

The impact of the coronavirus has caused oil prices to plunge, but the market expects this plunge to be temporary. This is reflected in the table above, where the price is lowest for the nearest term contract, and gradually increases as the term extends. The incentive for those that own oil is to wait out the economic slowdown and sell once prices recover. However, the supply of oil is rapidly approaching the maximum storage capacity. The only option for owners of the May contract that have no intention (they are speculators) or ability (no more storage) to accept physical delivery is to sell the contract. This selling pressure is what has caused the price to go deeply negative, while pricing in other contracts has been relatively stable around the $20 range. Oil prices are poised for a massive jump tomorrow, as June takes over as the quoted front month contract. It already has the highest volumes and open interest, likely making it a better representation of oil’s value.

Ultimately, sustained relief for the energy markets won’t come until the supply, demand, and storage issues are resolved. While the agreement between Russia and Saudi Arabia to cut production should help, many traders do not believe the cuts are sufficient to compensate for lost demand. As a result, this scenario may play out again in a few weeks as the June contract approaches expiry.


  • According to data published by FactSet, about 9% of S&P 500 companies have reported earnings for the 1st quarter as of last Friday. As of March 31st, the estimated decline in earnings was -6.8%. The blended growth rate from companies that have reported and estimates for those that have yet to report is now -14.5%. If this blended rate holds, it will mark the steepest earnings decline since Q3 of 2009 (-15.7%). Earnings are a significant driver of stock market returns, and their expected decline was a contributor to the market selloff that began in mid-February. While a decline in earnings was widely expected, investors will be looking for forward guidance from company announcements to shape expectations for the future. The damage to large U.S. businesses will continue to come into focus this week, as approximately 20% of S&P 500 companies are scheduled to report.  
  • Last Thursday saw another massive print of initial jobless claims, totaling 5.2 million for the week. This brings the total number of claims to over 22 million, representing 13% of the labor force. The one positive aspect of the data is that while the number remains terrifyingly high, it has declined in each of the last two weeks, suggesting we may be past the peak.
  • Aside from jobless claims, other economic printed last week, including retail sales, industrial production, various regional manufacturing indices, and the Index of Leading Economic Indicators. This data was generally negative and worse than expected.



  • Oil Plunges Below Zero for Frist Time in Unprecedented Wipeout (Bloomberg)
  • In Race for Small-Business Loans, Winning Hinged on Where Firms Bank (WSJ)
  • Who Pays For This (Collaborative Fund)


  • Charlie Munger: ‘The Phone Is Not Ringing Off the Hook” (Zweig)
  • Latest Memo from Howard Marks: Knowledge of the Future (Howard Marks)
  • Different Strategies For Putting Cash to Work During a Bear Market (AWOCS)


  • These Charts Put the Historic U.S. Job Losses in Perspective (Visual Capitalist)
  • Beer May Lose its Fizz as CO2 Supplies Go Flat During Pandemic (Reuters)


Source: MarketWatch



Source: Morningstar Direct.

Source: Morningstar Direct.



Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
  • BSBA, University of Nebraska, Lincoln, NE

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