Oil Tanks
The markets look to finish down a little this week giving back a small percentage of the recent gains. It all started with a historic drop in the price of oil and is finishing on another round of federal stimulus. With these two items moving markets this week, let’s take a closer look.
In a shocking turn of events, WTI Crude briefly went negative this week. This is an exceptionally unusual situation and is worth better understanding. For months now the price of oil has been falling. Even before the coronavirus hit, oil demand had been declining as the global economy slowed. Neither OPEC nor Russia would agree to slash oil production and the drop in the price of oil accelerated. Then the pandemic hit, and states issued stay-at-home orders. Recent data from Discover Financial suggests demand for petroleum dropped by 60% making matters worse. This all culminated with the May WTI Crude futures contract this week which went negative for the first time ever. Certainly, oil has value, but what if I told you there was nowhere to store it? That is the current situation. These oil contracts are expected to be delivered in Cushing, Oklahoma and there is literally nowhere to put the stuff. Traders are struggling to find enough ships, railcars, caverns, and pipelines to store the fuel. In fact, dozens of oil tankers have been booked in recent days to store at least 30 million barrels, adding to the 130 million barrels of crude already floating at sea. At the moment, there are three dozen ships gathered off the coast of California holding enough crude oil to satisfy 20% of the WORLD’s daily consumption. While WTI Crude has recovered somewhat in the past couple of days, it remains far below normal. In fact, the White House is considering a plan to pay oil drillers to stop drilling. These are indeed unusual times.
The other bit of news that moved markets is that Congress passed a $484 billion package to bolster small business and hospitals replenishing the previous bill that passed just a few weeks ago. It can’t come soon enough as another 4 million people filed for unemployment this week bringing the total over the past month to 26.5 million people. The measure injects another $310 billion into a key loan program designed to keep employees on small company payrolls. Included in this bill is $75 billion in hospital relief and $25 billion for coronavirus testing. The administration is also walking back recipients of the earlier aid who are public companies, hedge funds, or private equity companies. It is not clear how many companies received aid under the first aid package but there is some contentious debate that larger companies were put ahead of small companies. Banks stand to earn $10 billion in administering the aid, with one unintended consequence being that the larger the loan/grant, the more the bank earns in fees. Banks naturally focused on their largest clients first. Hopefully, the next round of aid is doled out more equitably.
In what I would consider a controversial move, Fannie Mae and Freddie Mac can now buy some single-family mortgages in forbearance in a move intended to “provide liquidity to mortgage markets and allow originators to keep lending.” While this may sound like a good move, it is essentially moving potentially bad debt off the balance sheets of financial institutions and onto that of the federal government. While Fannie and Freddie aren’t technically government agencies, if it walks like a duck and quacks like a duck… you know the saying. As of April 12, nearly six percent of all mortgages nationwide were in forbearance. That equates to roughly 3 million homeowners and is most likely higher today. Keep an eye on this as it develops in the weeks ahead.
In closing, I turn to beer. I know many of you may not drink the stuff, but it is becoming a big problem and not for the reasons you may think. I came across an article today that pointed out the beer industry is sitting on roughly 10 million gallons of unused beer left in venues during March with even more stuck at distributors’ warehouses. This beer, which will inevitably go stale, could cost the beer industry as much as $1 billion and getting rid of it isn’t as easy as it sounds. Dumping the unused beer isn’t an option. Environmental regulations say large volumes of beer shouldn’t be poured down drains or into rivers because it can disturb the pH balance, reduce oxygen in the water, and produce undesirable bacteria. Some creative solutions include sending expired beer back to distillers to turn it into hand sanitizer (beer scented?). I can already hear some of you saying, “I’m ready to do my part.” Now you know.