On April 22, 2020, West Texas Intermediate (WTI) crude oil prices did the unthinkable. The front month May 2020 WTI crude contract plummeted by $55.90 and finished the day at negative $37.63 per barrel!
It was the largest one-day plunge ever in the price of oil and the lowest closing price ever recorded. Never before had oil sold for a negative amount.
But why did oil prices go negative? The answer is very simple: the sudden appearance and fast spread of COVID-19 had caused the entire US economy to a halt that resulted in a massive decline in oil consumption, which left millions of barrels of oil nowhere to go. With storage facilities filled to the brim, people who had committed to buying oil suddenly had no place to put it. So they had to dump it at whatever price the market would take it.
The entire market for oil and gas stocks had been beaten down to unimaginably low levels. But what could be more contrarian than negative oil prices and people paying others to take oil off their hands? The night of oil’s unprecedented negative closing price, is one of these once-in-a-lifetime contrarian opportunity.
But why did people not invest in oil stocks at these incredible once-in-a-lifetime contrarian opportunity with low risk and exceptionally high reward? People should have noticed that oil will not be free or even negative for a long time.
We now know now that buying energy stocks in the spring of 2020 was a no-brainer. But at this time it was not so easy to invest in stocks. Those were scary days. Economies everywhere were closed. Oil inventory levels were incredibly high. We had no idea how bad COVID-19 would end up being. We can blame fear for not taking advantage.
If people would have bought an oil stock with a great business model like Viper Energy Partners (Nasdaq: VNOM) they would have made a profit of 450% today.
Right now is a great time to remind ourselves of these huge mistake because there is plenty of fear in the market and in the world these days. This fear has produced some terrific low-risk, high-reward opportunities again.
You should not become a contrarian just for the sake of being a contrarian. But when low-risk opportunities arrive, do your research and due diligence and don’t let fear stop you from acting.
Sven Franssen