Oil makes the world go round. WTI May futures are below zero.

The S&P 500 has seen an expected pull back. But what comes next is uncertain. Today we will open in the green.

Fig. 1: Is the expected pull back already over?

This is one way of looking at it. If, however, we use our standard graph and check RSI, we are in the middle of a trading range of around 2’600 to 2’850. Therefore, from a technical pint both ways are in the cards.

Fig. 2: S&P 500 trades below several resistance levels but above its support at around 2’600

This leave us with the standard answer – it depends on news flow. The last trading sessions were dominated by the drop of the May oil futures price to minus 40 dollar for a barrel.

Fig. 3: Negative WTI May future price

Today the WTI futures trades at around USD 11. The chart does not show any price below zero. This is another technical specialty. Today’s chart shows the June futures while yesterday we still have seen and discussed the May contract. In a month time this future might still fall lower since there is almost no storage left. That is why some speculators were willing to pay up to USD 40 per barrel in order not to get delivered the oil to them. This was mainly driven by oil ETNs.

Fig. 4: WTI actual future contract: The June contract was so far not below ZERO

ETN (exchange trades notes) which track the WTI oil price invest into the next two futures contracts (June and July). Given that we have a contango situation these products make roll losses.

Contango means that the June contract trades higher then the May and the July higher then June etc. I.e. when the ETN had to roll its May contract into June it has lost money. But before these products have seen a huge infolw. Retail investors bought the product to profit from rising oil price.

But atually they made the situation worse, as it put presure on the May contract. Forwardlooking this oil  ETNs will lose every month money while rolloing the actual contracti into the nex month contract. One of the largest ETN is the US oil fund.

Fig. 5: WTI Futures term structure in contango

Fig. 6: US oil fund

So even if the WTI oil price will mid-term rise these ETNs replicating the oil price movements with WTI futures will not profit until the contango situation will change to backwardation (i.e. the curve will not rise but fall, i.e. futures contracts are cheaper than the actual ones). This is not expected now. Therefore, you should not buy oil ETNs. If you want to profit from a possible oil price recovery, you can buy oil exploring companies, most of them have even announced that they keep paying their dividends. Or if you want to speculate on short-term price movements, CFDs (Contract for Differences) can be bought. But please note this is a pure speculation.

Fig. 7: Oil shares outperform crude oil

Unfortunately, this is not really helping us to answer the question where the S&P 500 goes next. We are in a trading range and probably we are going to retest the 2’600 – 2’650 area.

JP Morgan seems to have the same conclusion.

Fig. 8: JPM technical view on S&P 500

To sum it up – we cannot know if we have seen the bottom.

But follow a simple rule: Don’t fight the Fed.

The new announced additional Fed stimulus is larger than anything before.

Buy on weakness, but don’t buy all at once. So much depends on uncontrollable virus-related facts, that nobody knows if we have seen the lows already. But there is a high probability that we see much higher prices over the next 12 months, which means prepare portfolios for a mid-term recovery.

Published: 22/04/20 by Blackfort CIO Dr. Andreas Bickel

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