Oil is back over $15.

As you can see from the chart, the number of people piling into the Oil ETF (USO) is skyrocketing as the price becomes an apparent bargain, now $2.50 but the ETF is broken and now it's a chicken and egg thing as the bargain-hunters buy USO and that forces USO to buy oil contracts which has NOTHING To do with the fundamentals of oil but drives up the price of oil briefly but USO MUST dump the contracts (as they don't take delivery) by the end of the month at any price and that dump has rules and those rules can then be taken advantage of by traders who profit off the rollover. Given the situation – I think we'll have to dump out of USO for the duration – long before the month ends.


The ETF is reverse-splitting 1 for 8 as of April 29th, so we'll have to be out by then as it's more likely than not that oil will plunge into negative numbers again at the May, taking USO down with it, no matter what price they reset it too. So far, Trump has offered to buy 75M barrels of oil for the SPR and Trump has attempted to raise hostilities with Iran in attempts to boost the price of oil and it's working somewhat, with oil back to $15 but we just had a 25M barrel build in inventores yesterday so even if they fill the Strategic Petroleum Reserve to the brim – we still can't handle 4 more weeks of build like that!

Keep in mind the chart above represents all the storage in the US and we're only 20M barrels below the all-time high. They may find SOME additional storage but it's doubtful they find 50M (10%) more barrels worth to take us up to 600M – there's a limit to how many broom closets refineries can fill up. Even more immedite is the storage situation at the US's main hub in Cushing, OK, which has a very well-defined capacity of 80M barrels.


At least, that's what it says on the tanks but the tanks aren't designed to operate 100% full so it won't be very long before we find out what the physical limit actually is. It's like if you have an 8-ounce glass, if you actually put 8 ounces of water in it, it will spill out at the slightest movement so it's impractical to do so. We've never gone much over 70Mb at Cushing, so this is going to get very interesting very soon and if Cushing can't take any more oil – it doesn't matter how much oil the rest of the country can store as Cushing is the hub that sends oil out to 40% of the other storage areas.

We're already seeing half the oil rigs going off-line as they can't afford to operate anyway and 69% of the Fracking Rigs are off-line too – as they are the most expensive way to extract a barrel of oil which cost you $38.50 to pay someone to take it away on Monday - that's not a recipe for a successful business model, is it?


Despite all the cutbacks in drilling, yesterday the US had a 15M barrel build in Crude, a 1M barrel build in Gasoline and a 7.9M barrel build in Distillates and another 1.7M barrel build in "Other Oils" according to the Petroleum Status Report. That is WITH the export of 3.6M barrels per day of refined products to other countries and what happens when they run out of storage capacity too? That oil can then back up and flood the US with millions more barrels than the rig shut-down will save.

In other words, it's best not to play oil at the moment as it's a broken market and, while it's tempting to guess what will happen next, you have a President willing to plunge our county into war with Iran in the middle of a pandemic in order to prop up the prices for his friends – that makes things very hard to predict.

RB April 23 2020

President Trump tweeted early Wednesday that he has directed the Navy to fire upon Iranian "gunboats" that "harass" U.S. ships, which drove oil higher and Gasoline Futures (/RB) through the roof (we're long) so thanks for that. Former Navy Secretary Ray Mabus said the tweet likely does not change the rules of engagement because the Pentagon requires formal orders rather than "orders from Tweets." The United States has not defined harassment as a "direct threat." He posited that the president is "trying to distract from Covid-19."

While our 2 /RB long contracts are up over $9,000 each (stop at 0.725 goes up to 0.75 if we cross 0.775) that was a very obvious play from when gasoline plunged with oil on Monday but it's far too dangerous to bet on things in the middle of the channel – not with oil swinging from +$25 to -$35 in two days (and back to $15 now)!

What is oil really worth? Nothing if we're making more of it than we can use. Unlike most commercial inventory, you can't have a 2 for 1 sale on oil to increase demand over the short run. As noted in a very good Bloomberg article where the reporter attempted to purchase an actual barrel of oil – it's not something most people would want to do – at any price.

chart (45)

That then brings us to the question of what stocks are really worth in a World where no one goes shopping or leaves their homes? While we all HOPE this will be over soon – what if it's not? I had a fun theory in yesterday's Live Trading Webinar that Netflix (NFLX) may have a broken model as they expect you to watch maybe 4 hours a day of shows and, by the time you watch 1,460 hours worth of content (1 year), they'll have some new content for you to keep you interested.

But what happens to NFLX if you watch 16 hours of shows a day for 90 days? That's 1,440 hours right there and now, in months 4-12, you find yourself looking at NFLX and saying "I've seen it all". Not literally ALL of their content but all the content that YOU are even mildly interested in and, by then, you have checked and the rest of the shows clearly do suck and you can't believe your Mom even likes the one she said you "must watch" – what is wrong with her?


Anyway, Netflix's subscription model assumes there's always going to be something to keep you interest but there are no shows in production and no films being released and people are chewing through content at a ridiculous pace. I think that makes it very, very hard to justify NFLX's current $185Bn valuation at $421 as they only made $2Bn last year and $700M last quarter in which they added 16M subscribers but, rather than be all excited about the additions – how about we consider that during a global pandemic in which 4Bn people can't leave their homes, ONLY 16M of them were finally pushed to sign up for NFLX.

Even if we assume NFLX makes $3Bn this year (up 50%) and $5Bn next year as we remain shut in forever and they never run out of content, etc… That's still pricing them at 37 times ridiculously optimistic forward earnings. I think the run above $400 is ridiculous so for our Short-Term Portfolio, let's make the following play:

  • Buy 5 NFLX June $480 puts for $72 ($36,000)
  • Sell 5 NFLX June $420 puts for $33 ($16,500)
  • Sell 1 Sept $450 calls for $40 ($4,000)

That's net $15,500 on the $30,000 spread so our break-even is right about $450 and anything below that will be profit. The ordinary margin on the short call is just $3,737 so the market hasn't totally lost it's mind but we should set a stop on those short calls at $6,000, which would be over $450 as it wouldn't be worth the risk and then we'd have a net $21,500 cost on the $30 spread that we'd either adjust or give up on.

So a bit risky but fun to play!

Be careful out there.