The Historic Trading Action In Oil, Explained

WTI crude oil prices fell more than 100% to negative $40.32 per barrel on Monday, dropping into negative territory for the first time in history on concerns the U.S. may be running out of storage capacity in the near-term.

On Monday, Paul Perlman, vice president of Glenwood Financial, joined Benzinga’s PreMarket Prep and discussed why the May oil contracts are trading at such a large discount to June oil contracts — and why deliveries of physical barrels of oil are impossible.

Delivery On Hold

With June crude contracts trading so much higher than May contracts, it may seem like selling June contracts and buying May contracts is free money, but Perlman said that’s not the case.

“The May goes off the board tomorrow. Unless you’re a producer, the clearing firm won’t even allow you to be in that market because they can’t facilitate any delivery for you to get it,” he said. 

The unprecedented drop in May crude contracts is all about storage, Perlman said. 

“At this point, there’s no storage for the May contract. If you own the contract and were thinking of taking delivery as a producer, you have nowhere to put it. So you have to sell that contract out because there’s nowhere for it to go,” he said. 

Most large oil traders trade the spread between the current month contract and the next month’s contract because it’s less risky for traders to have exposure on both the long and short side at all times, he said. 

Perlman On How To Play It

Perlman also said investors need to be extremely cautious in buying oil ETFs like United States Oil Fund LP USO in anticipation of a rebound in oil prices.

“When I see things that take place like this with this kind of velocity to one side, it could take years before it’s going to turn around,” Perlman said.

Given the issues USO faces with contango, Perlman said oil bulls should simply cut their losses and lick their wounds at this point.

“At this point, fundamentally, I can’t really see why someone would be a permabull in oil. But that’s what makes a market, right? Somebody has to be on the wrong side,” he said. 

The USO ETF closed Monday's session down 10.93% at $3.75 per share.

Watch to the full interview with Paul Perman in the clip below, or listen to the podcast here

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

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