This morning investors woke up to see their shares of UCO go from $1.35/share to $23/share. What happened was a reverse stock split, at a ratio of 25 shares into 1 share. By the end of the day on April 21, 2020 UCO then proceeded to go down to $14.57/share. That equates to about a 57% loss if you’re holding UCO stocks outright, and slim chance of profit if you have call options.
UCO is an ETF which is supposed to change twice as much as the price of oil. Oil, as you may know, has experienced a historic epic drop in prices as the plague has hit the world and people are confined to their homes. On top of this, Russia and OPEC have not cut production and have both left their “ceasefire” of production cuts – so production has actually risen!
Oil futures have actually gone into negative territory, time will tell how long this lasts. My guess is that negative prices will be unsustainable and eventually companies will just stop production and leave it all to the low cost producers (see table below).
Crude Oil Cost of Production by Country
The alternative is if some of these higher cost of production countries increase subsidies for domestic production or cut off imports. UCO is based on WTI prices, which stands for West Texas Intermediate. WTI futures are traded in New York, and traditionally the delivery hub for this oil has been Cushing, Oklahoma.
If protectionist actions are taken and US prices increase I expect UCO to follow suit. Given the high dependence of oil jobs in some of the countries listed I have very little doubt other countries will also take measures to protect their local industries and jobs.
Having lived through $100/bbl days and talk of Peak Oil being thrown around, I would have never had thought we’d come to a point like this. It will be a tale for the grandchildren to tell about the days when gas prices were below a dollar again.
If you’re interested in investing in oil futures take a look at our video on oil ultras. WARNING – these investments carry a lot of risk, moreso than company stocks. This is to show you what exists and not recommend any action, you should use your brain and think hard about the potential downside and how high the expense ratio is on these instruments.