with Brent D. Griffiths
No, you can’t get paid to put gas in your car, now that oil futures have dropped into negative territory.
But when the price of the commodity fell below zero Monday for the first time in history — crashing past negative $40 in the late afternoon before recovering somewhat — it signaled a deep disruption in a coronavirus-battered market that could reverberate throughout the wider economy.
A short-term kink in the oil market precipitated the collapse as several factors converged.
A glut in supply — driven by Saudi Arabia and Russia flooding the world with production in their recent price war, and vanishing demand as people around the world shelter in place and international trade dries up — has left storage tanks close to full. That means oil producers literally are running out of places to put what they’re pulling out of the ground.
The storage hub of Cushing, Okla., for example, is three-quarters full, with “only 21 million barrels of free storage left, according to Rystad Energy, or less than two days of American production,” per the New York Times's Stanley Reed and Clifford Kraus. “As recently as February, Cushing was not even up to 50 percent. Now, experts say it will be filled to the brim in May.”
And the squeeze that has put on prices just collided with the expiration today of May futures contracts for West Texas Intermediate crude oil, the U.S. benchmark. “The price of oil futures converge with the price of actual barrels of oil as the delivery date of the contracts approach,” the Wall Street Journal’s Ryan Dezember writes. “Contract expiration also flushes out speculators who have no intention to take delivery of barrels of crude. Exchange-traded funds, which control a large number of futures contracts, are among those that must sell at expiration. The forced selling adds downward pressure to prices.”
But even now, consumers shouldn’t expect free fuel from Monday’s gyration. The June futures price for West Texas crude remains in positive territory. It has slipped below its recent $20 level this morning to settle below $15 a barrel. Meanwhile, Brent — the international benchmark, which is less subject to storage shortages — “declined 24% to $19.40 a barrel, the lowest since 2002," per Bloomberg. Nevertheless, "that means that by late spring, traders are betting that oil will still have some value,” Will Englund notes. Nationally, the average cost of a gallon of gas now sits at $1.81, down about a dollar over the last year.
President Trump at his nightly news conference spun the price collapse as an opportunity.
He opened the door for the federal government to buy oil on the cheap and top off the Strategic Petroleum Reserve. The president said the government is looking to add up to 75 million barrels, which would meet the reserve's 635 million barrel capacity. “But the reserve can take only about 500,000 barrels a day,” the Times notes.
Trump's latest posture marked a 360-degree pivot as prices have dropped recently: A week ago, he touted a deal he helped broker between Saudia Arabia and Russia to slash production as a major win for the domestic energy industry to “save hundreds of thousands of energy jobs in the United States.” (It is set to cut output by an estimated 10 million barrels a day, but oil consumption is expected to fall as much as 30 million barrels a day.)
A month before the deal, Trump hailed cheaper oil as a win for consumers, since it would yield lower prices at the pump.
There was some immediate fallout, starting with the stock market.
Oil producers and traders with direct exposure to the commodity weren’t the only ones dragged down by the historic crash. The broader stock market suffered a hangover, with the Dow Jones industrial average sliding 2.4 percent and the S&P 500 tumbling 1.8 percent. They were led lower by a selloff in energy stocks, which shed 3.3 percent. But the entire sector's value is now eclipsed by each of the four biggest tech companies, according to Bespoke Investment Group:
For the broader market, Frank Verrastro of the Center for Strategic and International Studies told Jacob Bogage and Tom Heath, “the concern is that the lack of demand shows we aren’t going to come out of this downturn like a V. It’s going to be a global recession.”
And Moody’s Investors Service warns the oil shock could contribute to credit stress on major financial institutions providing lending or insurance to the industry, as dirt-cheap oil makes it difficult for companies to service their debt and could force a wave of bankruptcies.
“Although the coronavirus and oil shocks will not lead to immediate and wholesale changes in the ratings of most regulated banks and insurers, the credit profiles of many will become increasingly vulnerable to the extent the economic shock broadens and lengthens relative to our baseline macroeconomic assumptions,” analysts with the ratings agency wrote in a Monday note. “The coronavirus outbreak as well as the oil price shock will have a direct negative impact on the asset quality of rated financial institutions.”
The future could look like Canada.
Canadian oil companies already have started shutting down production. “Shutting-in production is a very painful decision for an operator to make — often the economics support running a well at a loss for a certain period of time rather than shutting down the project completely. But with infrastructure constraints, this is no longer an option for many landlocked producers,” Rystad Energy Senior Oil Market Analyst Teodora Cowie tells Englund.
U.S. oil producers may follow suit. “What will happen now will be even worse than a price collapse: a systemic failure that forces some U.S. producers to turn off the taps,” the Wall Street Journal’s Spencer Jakab writes. “The U.S. contribution to the OPEC deal was something for nothing—promising an output cut that would be a result of market forces while big exporters such as Saudi Arabia and Russia consciously pumped less. But the collapse in fuel demand has been so rapid that the American producers Mr. Trump sought to help will be making a heftier contribution and bearing a lot more pain in the short run.”
Money on the Hill
No PPP deal yet as talks hit last-minute snags.
Pelosi was optimistic that an agreement is not far off: “The White House and Congress on Monday tried to design another giant bailout package aimed at combating the coronavirus pandemic’s economic and health fallout, scrambling to resolve last-minute snags over loan access and testing,” Erica Werner reports.
“'We have I believe come to terms on the principles of the legislation, which is a good thing, but it’s always in the fine print,' House Speaker Nancy Pelosi (D-Calif.) told CNN on Monday evening. ‘And so now we’re down to fine print, but I feel very optimistic and hopeful that we’ll come to a conclusion.’"
- Votes on the agreement are expected as early as Tuesday afternoon in the Senate and Thursday in the House: “The new package would amount to roughly $470 billion in new spending, with $370 billion directed to small businesses, $75 billion going to hospitals, and $25 billion set aside for testing.”
Democrats are pushing more money for testing: They want a “'comprehensive national testing strategy,' Senate Minority Leader Charles E. Schumer (D-N.Y.) said in a tweet. The Democrats were seeking ‘free testing for all, and expanding reporting and contact tracing,’ Schumer said. But Treasury Secretary Steven Mnuchin and other Trump administration officials were seeking a ‘state-driven approach and flexibility,’ according to a senior administration official, who spoke on the condition of anonymity to describe the private talks.”
- The Paycheck Protection Program ran out of money last week: “The new measure would seek to devote an additional $310 billion to the Paycheck Protection Program, an initiative created by last month’s Cares Act that was initially funded at $349 billion but has since run dry. The Small Business Administration stopped accepting loan applications for the program last week after 1.6 million firms obtained taxpayer-backed, forgivable loans. The White House and Republicans demanded more money for the program, but Democrats said they would only support the measure if they received more money for hospitals, cities and states.”
The program is facing intense criticism after large companies received loans.
“The federal government gave national hotel and restaurant chains millions of dollars in grants before the $349 billion program ran out of money Thursday, leading to a backlash that prompted one company to give the money back and a Republican senator to say that ‘millions of dollars are being wasted,’” Jonathan O'Connell reports.
Among those benefiting:
- “Ruth’s Chris Steak House, a chain that has 150 locations and is valued at $250 million, reported receiving $20 million in funding from the small business portion of the economic stimulus legislation called the Paycheck Protection Program."
- “The Potbelly chain of sandwich shops, which has more than 400 locations and a value of $89 million, reported receiving $10 million last week.”
- Shake Shack, a $1.6 billion burger-and-fries chain based in New York City, received $10 million but is returning the money. Company founder Danny Meyer and chief executive Randy Garutti “said they had no idea that the program would run out of money so quickly and that they understood the uproar.”
Four big banks are being sued over their administration of the loans: “Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co. and U.S. Bancorp were sued by small businesses that accused the lenders of prioritizing large loans distributed as part of the virus rescue package, shutting out the smallest firms that sought money,” Bloomberg News's David McLaughlin, Mark Niquette and Olivia Rockeman report.
“The four banks processed applications for the largest loan amounts because they generated the highest fees, rather than processing them on a first-come-first-served basis as the government promised, according to lawsuits filed Sunday in federal court in Los Angeles. As a result, thousands of small businesses that were entitled to loans under the program… were left with nothing, the plaintiffs said.”
Two new ways to track the federal response. Here are a pair of just-launched tools allowing you to keep an eye on Washington's unprecedented multi-trillion-dollar intervention in the economy.
- The Committee for a Responsible Federal Budget says its “COVID Money Tracker” will “track every significant financial action taken to address the current crisis and then follow the dollars over time.” Find it here.
- Better Markets has rolled out TRACER to “catalogue every coronavirus-related action taken by the financial regulatory agencies.” Find it here.
The White House is planning to slash regulations as a way to boost the economy.
The plan could affect a wide-range of regulations: “Senior White House and Trump administration officials are planning to launch a sweeping effort in the coming days to repeal or suspend federal regulations affecting businesses, with the expected executive action seen by advisers as a way to boost an economy facing its worst shock in generations, two people familiar with the internal planning said,” Jeff Stein and Robert Costa report.
“While the plan remains in flux, changes could affect environmental policy, labor policy, workplace safety and health care, among other areas. The White House is also likely to seek to make permanent some temporary regulations issued by agencies over the past few weeks to respond to the coronavirus pandemic.”
- The changes could come as soon as the end of the month: “Still, the Trump initiative will probably be fiercely criticized by congressional Democrats and other economic experts, who say the administration’s attempts to repeal business regulations reflect long-standing conservative priorities rather than a measure that will help Americans survive the current public health and economic emergency.”
Most Americans don't expect a return to normal anytime soon.
Trump's push to reopen is failing to assuage many: “A majority say it could be June or later before it will be safe for larger gatherings to take place again, according to a Washington Post-University of Maryland poll,” Scott Clement and Dan Balz report.
“Most Americans — 54 percent — give the president negative marks for his handling of the outbreak in this country and offer mixed reviews for the federal government as a whole. By contrast, 72 percent of Americans give positive ratings to the governors of their states for the way they have dealt with the crisis, with workers also rating their employers positively.”
- Partisan allegiances have a big effect:
In the U.S.:
- Trump says he will issue an executive order to suspend immigration: The president announced the move via a tweet last night. “[He] is running for reelection on his immigration record and his effort to build a wall on the Mexico border, has long been frustrated with the limits on his ability to seal off the United States by decree. An executive order suspending all immigration to the country would take the president’s impulses to an untested extreme,” Nick Miroff, Josh Dawsey and Teo Armus report.
- States burn through cash for unemployment payments: “Nearly half of U.S. states have logged double-digit percentage declines in their trust-fund balances since the end of February, the month before the coronavirus pandemic triggered shutdowns that led to widespread job losses and record numbers of jobless claims,” the Wall Street Journal's Sarah Chaney reports. “From the end of February to mid-April, New York had used about half of the trust-fund money it had on tap, representing one of the steepest declines among states.”
- Fauci tells protesters reopening too quickly could be problematic: “Anthony Fauci, the top infectious disease expert on the White House coronavirus task force, pushed back against protesters demonstrating against stay-at-home orders, saying the U.S. economy won’t recover until the virus is ‘under control,’” Bloomberg's Jordan Fabian reports.
- White House tells federal workers to prepare to return to office: “… The memo said to allow employees to work from home until state and local authorities begin reopening their economies under the three-phase plan the White House outlined last week,” Bloomberg's Justin Sink reports of Office of Management and Budget Director Russ Vought's memo that was distributed to the heads of federal departments and agencies.
- “Big Three” airlines prepare for painful fall: “… The journey promises to get worse this fall when billions of dollars in government assistance comes to an end. Several carriers, including Delta Air Lines Inc. and United Airlines Holdings Inc., have begun openly contemplating how they will shrink operations, while American Airlines Group Inc. is moving to shed more of its older planes,” Bloomberg News's Justin Bachman and Mary Schlangenstein report.
- Restaurants are on track to lose $240 billion by end of the year: “The National Restaurant Association said its latest survey showed two-thirds of its workers — more than 8 million people — have been laid off or furloughed as four in 10 restaurants are closed. But the Washington, D.C.-based lobbying group said existing federal relief programs will not help restaurants prevent more layoffs,” Reuters's Hilary Russ reports. The restaurant association asked Congress for a $240 billion rescue fund, after its request for $145 billion a month ago was unsuccessful.
- UAW and automakers in talks to reopen plants: “… Local union leaders said on Monday any workers who feel sick must be allowed to self quarantine without losing pay,” Reuters's Nick Carey reports. “So far, neither the union nor the automakers have announced a deal. But the Detroit automakers all are aiming to restart at least some U.S. assembly plants in early May."
- GM, Ford credit arms may lose billions: The losses are linked to the dramatic drop in used-vehicle prices, JPMorgan Chase & Co. analysts said, Bloomberg's David Welch and Keith Naughton reports.
- Boards reset executive pay: “As companies furloughed or laid off workers and cut other costs, many chief executives have had their base salaries cut for 2020 by anywhere from 50 percent to 100 percent. In many cases, they also have received stock or option awards meant to motivate and reward long-term performance—in some instances, as stocks hit recent lows in March,” WSJ's Theo Francis, Coulter Jones and Susan Pulliam reports.
Around the world:
- WHO warns of hurdles for a vaccine: “Even if scientists successfully develop a vaccine for the coronavirus, making it widely available will be a challenge, Michael Ryan, the executive director of the World Health Organization’s emergencies program, said at a briefing,” Antonia Farzan reports.
- Australia will resume some non-emergency elective surgeries: “The measure to suspend such surgeries was taken to free up hospital resources for coronavirus treatments, at a time when ICU cases overwhelmed hospitals in Italy and other hotspots,” Rick Noack reports.
Companies' earnings this week will provide an in-depth look into the crisis.
Almost one-fifth of the S&P 500 will report their earnings this week: “Many of the companies reporting — including Delta Air Lines Inc., Coca-Cola Co. and International Business Machines Corp. — are logging results for the first three months of 2020. The results will show only some of the fallout from the coronavirus pandemic as the U.S. economy didn’t shut down widely until the quarter’s final few weeks,” the WSJ's Allison Prang reports.
“Less than a tenth of the S&P 500 have reported results so far this earnings season, and profits have fallen almost 15 percent, according to FactSet. If that decline holds after other companies report their results, it would be the biggest year-over-year profit decline since the third quarter of 2009, when earnings dropped almost 16 percent, FactSet said. One company expected to benefit from the current stay-at-home culture is video-streaming company Netflix Inc., which reports its results [today].”
From Charles Schwab chief investment strategist Liz Ann Sonders:
In just the past 5 weeks, the S&P has had both its best one-month change since 1933 and its worst one-month change since 1929 pic.twitter.com/dPN2sbY4dS— Liz Ann Sonders (@LizAnnSonders) April 20, 2020
- Coca-Cola, Netflix, JetBlue Airways, Travelers, Revlon, Phillip Morris International and Snap are among the notable companies reporting their earnings
- Biogen, Quest Diagnostics, AT&T, Delta Air Lines, O’Reilly Automotive, Spirit Airlines, Discover Financial Services, Las Vegas Sands, Boston Beer and Alcoa are among the notable companies reporting their earnings
- Eli Lily, Southwest Airlines, Domino's Pizza, Aaron's, Union Pacific, Intel, Blackstone and Capital One Financial are among the notable companies reporting their earnings
- American Airlines, Verizon, Goodyear Tire and American Express are among the notable companies reporting their earnings
From The Post's Tom Toles: