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Stock Market Wrap-Up: 3 Big Stock Winners From Negative Oil Prices

By Dan Caplinger - Apr 20, 2020 at 4:34PM

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The market was lower Monday on concerns about the economic fallout from the coronavirus pandemic.

Stock markets fell on Monday, reacting to disruptions that have stemmed from the economic reactions to the coronavirus pandemic. In particular, the near-standstill in industrial activity has dramatically reduced demand for energy, and the glut of production has led to the unprecedented situation in which near-month futures contracts are trading at negative prices.

The Dow Jones Industrial Average (^DJI 0.00%) proved most sensitive to the ramifications of that turmoil, but the S&P 500 (^GSPC -0.88%) and Nasdaq Composite (^IXIC 0.00%) also saw losses.

Today's stock market

Index

Percentage Change

Point Change

Dow

(2.44%)

(592)

S&P 500

(1.79%)

(51)

Nasdaq Composite

(1.03%)

(89)

Data source: Yahoo! Finance.

Many oil and gas exploration and production companies lost ground on Monday as it appeared there'd be no market for the oil they produce. However, stocks of companies that own oil tanker ships saw their shares soar as market participants looked for ways to store crude at any cost. That sent Teekay Tankers (TNK -2.16%), Nordic American Tankers (NAT 0.00%), and Scorpio Tankers (NYSE: STNG) up almost 20% each, and further gains could be on the way if the incentive to keep oil on tanker ships remains as high as it is.

What happened with oil?

At first glance, what happened in the oil markets would seem almost impossible. May crude oil futures traded at negative $34 per barrel. That means those owning futures contracts were willing to pay others $34 per barrel to take those contracts off their hands.

A red tanker ship at sea

Image source: Getty Images.

Why would traders want so badly to get rid of oil that they'd pay somebody to take it? Pretty much all of the ordinary places to store crude are full right now, because demand has fallen off a cliff, and supplies have continued to build. Producers don't want to stop pulling oil out of the ground because there are fixed costs involved with doing so, but negative prices should eventually be enough to persuade them to shut down production.

Just put it on a boat

Until that happens, though, players in the oil market are looking for anywhere they can to store oil. Consider: If you take delivery of oil in May and get paid $34 per barrel, hold onto the oil for a month, and then sell a futures contract to deliver oil in June at the current price of $21 per barrel, you'll end up with a net profit of $55 per barrel. That's not bad for a month's work.

Judging from the big price gains for tanker stocks such as Scorpio, Nordic American, and Teekay Tankers, at least some professional investors are making plans to do exactly that by using tanker ships as temporary storage. That gives the tanker companies plenty of leverage to rent out their unused capacity -- and the ships don't even necessarily have to go anywhere. As long as investors can take delivery according to the May contract and then deliver the oil back under the terms of the June contract, they'll be happy. They'll also be more than willing to share the profits with tanker stocks.

As long as supply and demand for oil remains out of balance, these conditions in the oil futures markets could continue. That's bad news for oil producers -- but it gives oil tanker shipping companies an extra source of revenue they can use to bolster their bottom lines as long as it lasts.

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Stocks Mentioned

Nordic American Tankers Limited Stock Quote
Nordic American Tankers Limited
NAT
$2.13 (0.00%) $0.00
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
TNK
$17.63 (-2.16%) $0.39
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,029.31 (0.00%) $0.00
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,785.38 (-0.88%) $-33.45
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$11,177.89 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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