By Steve Tepper, CFP®, MBA

April 20, 2020 was a very interesting day in the commodities markets. May Crude opened at $17.73, fell steadily to about $11 by noon, and then went into a tailspin. At around 1 p.m., it was trading below $5 a barrel, and for the first time since I became a financial planner, I gave serious consideration to making an investment in something other than a boring old diversified, low-cost mutual fund. 

Contracts for 200 barrels, I figured, would cost $1,000, and the worst-case scenario would be losing the whole grand, with an upside possibility of making a couple of thou if the price bounced to something normal. 

Then I thought of a worse-than-the-worst case scenario, and that’s what stopped me. If I was unable to sell the contracts, which expired that day, I’d end up receiving a shipment of 8,400 gallons of crude oil. I considered how several times over the previous couple of weeks our internet went out, once for the whole day. So thanks to Comcast, I didn’t pull the trigger. 

It is very rare you will ever hear these words: “Thank you, Comcast.” Of course, what I’m really saying is “Thank you, Comcast, for being so awful and unreliable you inadvertently stopped me from making a big mistake.” They probably get that a lot.

In the end, it wasn’t a wonky Wi-Fi connection that would have hurt me. Yep, there was a worse-than-the-worse-than-the-worst-case scenario. About an hour later, I clicked over to Yahoo Finance, and oil was trading at negative $35 a barrel!

How can something trade at a negative value? It’s a question we considered only in theory until 2020, but here we are. If I had been holding those contracts for 200 barrels, I would have had to pay someone $7,000 to take them off my hands or else start clearing all the furniture out of the house to make room for a really big delivery. 

My $1,000 maximum loss could have been $8,000. Or more. 

This is what was happening in the commodities market that day: Investors were dumping their May contracts en masse and rolling their money into June deliveries. With OPEC failing to curtail production for weeks into the economic freeze, and with demand at rock bottom as people have been staying home, gas stations haven’t been taking deliveries from refineries, leaving shippers, pipelines, and refineries over capacity. No one in the supply line wanted one more barrel coming and were willing to take a massive loss on the sale of their contracts to cancel May deliveries.

It all makes perfect sense. Or at least it does now. Before April 20, this had never happened in history. 

This year marks a quarter century since I earned my MBA in finance, and 13 years as an Investment Advisor Representative. What all that education and experience should have taught me is I don’t know anything! Just when you think you’re clever and have come up with a “safe” risk, there is always a scenario worse than the worst one you can imagine. Or even worse than that!

Meanwhile, back in the boring world of diversified, low-cost mutual funds, April has been a better month than March (at least as of the day I am writing this). Rebalancing has been an effective means of putting our clients in a good position when markets recover. We still don’t know if that’s sooner or later, or if more pain awaits us first, but the elimination of diversifiable risk is an effective strategy to avoid a worse-than-worst case surprise. Speculating on commodities is an almost entirely diversifiable risk. I’ll leave it to the stronger hearted.