By now I am sure everyone is aware of the utter turmoil last week in the oil markets, particularly because WTI went negative on the COMEX with the expiring contract.  As I am writing Monday, April 28, oil is down by another 27% on the next month’s contract, to just over $12.  This obviously can’t last.  On average, OIL costs 3-4 times current prices just to get it out of the ground, which means producers are losing $30+ per barrel.  The math on the daily losses isn’t pretty.

Something has to change, but when that will occur I just don’t know.  In the meantime, I see a couple opportunities because of the situation. The first of which is to learn a cautionary tale, that if it happened (and is continuing to happen) in oil, it can happen again and again, and literally anywhere else. And for the same or similar reasons.  It just highlights the risks of owning paper assets with a third party counter risk.  I mentioned third party counter risk several times in the past, but let’s stay focused on the opportunities for now.

Second is that because of the ultra low price, hundreds, if not thousands of oil/gas wells will shutter (we're seeing announcements, especially from sovereigns and OPEC+), and many companies will go out of business regardless of the tweeter in chief promising federal funds to support the industry. $WLL and $DO already come to mind. We'll also see a lot of mergers and acquisitions as well as major oil companies picking up the assets of the bankrupt companies for pennies on the dollar. The whole industry will consolidate and streamline, which brings down the total cost of doing business. The major oil companies are a good opportunity, but they are probably still waaay overpriced.

Even better than the major oil companies themselves is natural gas. With every oil well that shuts, it also cuts off the supply line of natural gas. As new supply shrinks, stored supply will have to be used and eventually the new supply won't come out of the ground and make it to market fast enough. Especially heading into the late fall when people start using gas for heating. Gas itself traded as low as about $1.63 this morning in the futures market. It looks to have bottomed previously around $1.55-$1.60. Soon enough though the price will move towards $2.30-$2.50, for at least a 20% gain. Better than playing natural gas would be the companies that extract it, because resource extraction companies are generally leveraged to the price of the resources they extract.

Also in the energy sector, transport and storage is just about full to capacity. As you may recall, it takes years for regulatory approval for new infrastructure, and years more to build it. Think about the Keystone and Dakota pipelines.  Regulatory approvals stalled during the Obama administration.

In any case, midstream companies are responsible for transportation and storage of oil and gas from crude to refined products and everything in between. Two years ago the federal energy regulatory commission eased regulations and allowed these companies to not only renegotiate their long term contracts with producers and refiners, but also charge higher prices without the immense regulatory oversight. Midstream companies became freer to operate as they see fit. With storage at capacity that means higher prices for producers and refiners to gain access to the storage and transport, which means higher profits for midstream companies who provide the storage and transport.

Finally, all natural resources require immense amounts of energy to extract from the ground and transport to each stage of refinement and final product. Energy is one of the biggest costs for these companies...precious metals, base metals, fertilizer, lumber, and anything else we take out of the ground. For these companies, oil is quite literally dirt cheap, and these prices open up additional cash flow.

For the companies who are seeing a rising price of their product combined with a lower cost of energy in the production and transportation process, their profits will handily outperform all expectations. The most likely place to see the greatest profits here is going to be in precious metals, because it's the only resource sector whose prices (nominal and real) will continue to rise as the governments of the world announce more and more easy money policies. As they announce more and more of these policies it is actually a recognition that the economy is moving further in the wrong direction. That's bad for base metals and other resources used in producing cars, pipes, wires, electronics, housing, buildings, equipment, etc, but supremely good for gold.

Platinum and palladium are more of an industrial metal because their primary use is in catalytic converters in cars and trucks. Silver straddles the fence between base metal and precious metal. It will have downward pressure from the industrial side, but upward pressure from the precious metal side. Additionally with silver, as base metals are used less and less and as their price will fall, some of the base metal mines will be closing. With few exceptions, silver is mostly a byproduct of mining zinc, lead, and other metals, and that will bring supply of silver off line as well, which is good for the price.

As always, you must do your own due diligence before making any moves in your portfolio.  Current market conditions require you to stay nimble and hold a large proportion of cash.