Two weeks ago, OPEC+ and the US came to a deal to cut crude oil production. President Trump hailed the deal, saying it would save “hundreds of thousands” of oil patch jobs. The Texas Railroad Commission meets today to “consider” a cut in oil production in the Lone Star state. Meanwhile, the market has made all this high-level negotiating irrelevant, crashing into negative territory on Monday as the May crude oil futures contract settled at $-37.63.

Yes, that is a negative sign in front of the 37. It closed last Friday at $17.95 so the loss Monday was over $55/barrel, a percentage loss of over 300%. That is, as you might guess, a record loss for a single day. Well, actually it is a record loss for any period of time because crude oil, to my knowledge, has never traded at a negative price.

What does it mean? It means that OPEC+, basically Saudi Arabia and Russia, will be cutting production before the May 1 date their recent agreement calls for because the demand for oil has collapsed. And there’s very few places left to store it which is why the price for delivery went negative. Anyone still long the May WTI contract today will be obliged to take delivery of 1000 barrels of crude oil in Cushing, OK. There is no place to put it in Cushing but if they can get it to the Gulf of Mexico, they might be able to lease a tanker for $400,000/day (or more) to store it until someone actually needs it. You could have leased that tanker for about $50k/day back in January by the way.

The commentary yesterday was mostly that this didn’t really mean anything because other contracts that expire further in the future were trading at higher prices. And that is true; crude for delivery in June was trading over $20/barrel and December 2020 was over $32. Except today June is trading at $15 9 and December is trading at $30 27.50. I think I’m starting to detect a trend.

It doesn’t matter how many deals President Trump negotiates or whether the Texas Railroad Commission orders a production cut. Oil production will fall because it has to fall. US shale producers are already shutting down, laying off workers and pretty soon filing bankruptcy. There is no production deal to be had that will change that. The only thing that saves the shale industry is the world economy opening up soon – and it may be too late for that – or the Trump administration crafting one more bailout. Or maybe the Fed will add crude oil to the list of assets it is warehousing on its balance sheet. Maybe they can store it in the Capital One arena. With a record of 24-40, the Wizards were barely using it before COVID-19 anyway.

Even if you aren’t trading the crude oil market the crash does provide valuable information – and maybe an opportunity. Crude oil futures trading at $30 27.50 for December delivery is an indication of what the market – the crude oil market anyway – believes is the likely course of the COVID-19 pandemic. It seems obvious that the oil market believes that demand will revive, at least to some degree, by December. Indeed, with August trading at $27 22, the oil market would seem to believe that we’ll be back to work pretty soon. And yesterday, with June trading over $20, the market apparently believed we’d be back to work even sooner. Yesterday the crude oil market crashed into reality.

Stocks sold off with oil yesterday and the selling has continued today. The S&P 500 has staged a massive rally off the lows based on the same optimistic timeline as the crude oil market. The oil market debacle yesterday was a wakeup call for the “buy the dip” crowd, their fantasy of a “V” shaped recovery slipping away on an oil slick. There are some states starting to relax their stay at home orders – some more than others – but getting back to where we were before the virus shut everything down isn’t just a matter of telling everyone to go back to work.

There is also, as I mentioned above, a potential positive, an opportunity that comes out of the oil crash. While the crash of the shale “revolution” will be painful for Texas and a few other states, lower oil prices are a boon for the rest of the country. It just doesn’t make sense to rely so heavily on oil extraction for growth, favoring the few in the oil patch over the many who aren’t. Think how much better off we’d be right now if the billions invested in extracting high-cost oil had been invested in….damned near anything else.

And while shale producers will be hurt, others in the energy business are likely to benefit. Natural gas producers have faced a glut of gas for years due to overproduction from the shale fields. As shale is shut down, the natural gas glut will ease and prices will rise. Stocks of natural gas producers were up yesterday even as oil prices cratered. In addition, there will be opportunities for companies who managed their balance sheets well to pick up assets on the cheap from those that didn’t. And the majors all produce natural gas in addition to crude oil so there is some offset if gas prices keep rising.

I don’t have any great insight into the future course of the virus. I try not to get too excited about positive developments or too down about the negatives. And frankly, sometimes I’m not sure which is which. I do know that the economic fallout is widening and there has been considerable damage that will not be reversed no matter how soon we re-open. The impact of the oil market crash is widespread, hitting not just oil companies but their bankers and every other business that supports them and benefits from the associated economic activity.

Does that mean we should try to bail them out as we have other industries? I don’t think so, but I may be in the minority on that. Capitalists seem to be in short supply right now, especially in Congress. Should we just throw caution to the wind and open everything? That seems foolish too, but I think there is a limit to how long we can keep this up. We need to start figuring out how we can live with this and minimize the long-term damage.

The timeline for recovery in the oil market was obviously overly optimistic. Markets now have to price in something that takes longer; a more drawn-out affair. Does that mean a retest of the stock market lows? Maybe, but as with the virus news, I want to keep an even keel and stay focused on where we are today, rather than where I think (hope) we are going tomorrow.