At least on the economic front not much has changed and the contrast between the economic data and the markets just gets starker, with the former basically confirming what we already know, while the latter seems oblivious.
Weekly jobless claims came in at roughly 4.2 million this week, bringing total claims since the crisis began to roughly 26 million.
Such a quick spike in unemployment is relatively unprecedented in modern history, but not totally so. MRB Partners draws an interesting parallel.
“(the job losses are) on a global scale with an unknown next stage(s), it is not unlike other natural disasters (such as major Hurricanes, tsunamis, earthquakes or wildfires), where the recovery effort can begin once the threat passes (chart below). The difference is that it will take much longer for the COVID-19 threat to fully dissipate since it is reliant on a medical breakthrough, which will take time, especially for the vulnerable segment of society. The partial offset is that there has not (yet) been the capital destruction that typically occurs with a natural disaster (although this is reliant on effective interim policy support), so people can return to their previous lives (if desired) without first the need for a reconstruction effort.”
And just as in weeks’ past, the support measures continue to drip out. This time Congress approved $484bn in additional fiscal spending. The money will be spent as follows:
– $349bn for the small business Paycheck Protection Program. This brings the total commitment to this program to $659bn.
– Hospitals and providers are eligible for $75bn in additional reimbursement for coronavirus-related expenses and lost revenues.
– Provides $25bn for expanded testing, $11bn for state and local governments, and $4bn for government health institutions.
Of course, this isn’t the end of it. The next phase will be money for state and local governments. Mitch McConnell made the press this week when he said he opposes such measures and that he’d prefer states go bankrupt (presumably to get out from under their retirement obligations). This left a lot of people scratching their heads. Is this really the time to let Illinois go belly up? Current employees, retirees, state bond holders, suppliers, etc. would all face harsh repercussions. Most chalk up the comments to a ‘negotiating ploy.’
All the while the Fed pours on the coals. The Fed’s balance sheet topped $6.5tn this week, up a cool $2.2tn over the last six weeks.
Meanwhile, money supply growth is at the highest level since 1959, as you can see below. That’s pretty impressive.
Not much of it is getting spent, I grant you (velocity of money is falling). But if ever there is a reason why the markets seems to be disconnecting from the economy the chart above goes a long ways towards explaining this dynamic!!
Now They Are Giving it Away
The oil markets were in chaos this week. For the first time in history prices went negative, at least for West Texas Intermediate (WTI) for delivery at Cushing Oklahoma. The May WTI contract closed at -$37.6/bbl, the first negative settle ever, after posting the largest one-day sell-off ever of $55.9/bbl. Needless to say, a number of people lost a whole bunch of money!!
Negative oil prices mean that producers/contract holders are effectively willing to pay someone to move their crude. While this was already happening in parts of Texas and Canada, this week’s WTI move reflects the fact that holders of May WTI futures contracts were effectively willing to pay someone to get them out of their long positions before expiration to avoid being physically delivered crude oil next month, when storage capacity will have run out.
And this gets to the heart of WTI futures contracts. The terminals in Cushing, OK are the delivery point for WTI crude oil futures, the most active commodity derivatives in financial markets. Say you produce oil. You sell your product forward through the use of a futures contract. You ultimately deliver the final product to a tank in Cushing. As the Financial Times noted this week:
“More than 2.4m barrels of crude is now set to be delivered to Cushing next month in fulfilment of WTI contracts, exchange operator CME Group disclosed on Wednesday. Yet most of the remaining room at Cushing is either leased or needs to be kept open to maintain operations, the consultancy Rystad Energy said. Cushing is connected by more than a dozen pipelines in and out, but options to send oil elsewhere are limited.”
Now not all oil contracts traded in negative territory. Brent, the international benchmark, lost 9% on Monday to fall to $25 a barrel, as you can see below.
Brent is what is called a seaborne commodity – meaning it is traded as a financial abstract rather than physical entity, based on reserves stored on ocean-roaming supertankers. Land-based storage facilities like Cushing are much closer to reaching full capacity than sea-going tankers (but there is a limit here as well).
Prices bounced back near the end of the week as the front month contract rolled to June delivery. However, unless production is dramatically scaled back in the next couple weeks, we could see a similar dynamic play out as we approach the end of the June contract. Good times!!
Who Stands to be Hurt?
In years past negative oil prices would be a boom for the U.S. economy. After all, we used to buy a lot of the stuff from less than friendly parts of the world. However, in recent years we’ve turned into the biggest producer, as you can see below.
Needless to say, there is going to be some pain in some parts of the country. It’s no surprise that states such as Wyoming, Alaska, and Oklahoma stand to lose the most.
In Wyoming yesterday you could buy regular unleaded for $0.76/gallon.
Who else stands to lose? Peter Zeihan posted an excellent summary this week that I’m reproducing below. If you remember, a few weeks ago Saudi Arabia and Russia got into it over production levels. Saudi basically told Russia that if they didn’t cut production they would turn on the taps and bleed them to death. And turn the taps on they did!!
“The Saudi price war started out as a spat with the Russians over carrying the burden of a production cut. It has since expanded into the Saudis targeting the end markets of every single one of what the Saudis’ consider to be inefficient producers. The Saudis are directly targeting markets previously serviced not just by US shale and Russian, but those serviced by Kazakhstan and Azerbaijan and Libya and Iraq and Iran and Malaysia and Indonesia and Mexico and Norway and the United Kingdom and Nigeria and Chad and you get the idea.
As of this morning, there are still at least 24 supertankers carrying at least 50 million barrels of Saudi crude en route to the U.S. Gulf Coast. Most will arrive in May, seeking to fill up as much of what remains of U.S. storage as possible. Similar volumes are in route to Europe and even bigger volumes to Northeast Asia. In most cases the destinations are the transshipment nodes that enable distribution of inland-produced oil to coastal locations: Rotterdam, Suez, Singapore, Korea.
Assuming you’ve got deep pockets, and Saudi Arabia’s are some of the world’s deepest, it isn’t a stupid strategy. If the Saudis can push prices firmly negative, it will absolutely crush many of the world’s energy producers. My back-of-envelope math suggest some 20 million barrels per day of production capacity – one-fifth of global output – will go offline for years. And then Riyadh will have what it wants: the ability to raise prices as much as it wants and to reign supreme over the world of oil for at least several years.”
He then goes on to list the major losers from the Saudi’s strategy:
• Canada’s Alberta province has the most to lose. Not only landlocked, it must sell all its oil into the American market that is already so saturated. Its production must be shut in for years.
• Venezuela was facing civilizational collapse due to mismanagement before oil prices tanked. As oil is the government’s only remaining income stream, this marks the end of Vene as a country. Its oil will not come back for at least a decade, and even then only if an outside power first physically invades the place to rebuild the country from scratch.
• America’s sanctions regime against Iran has been so successful the country isn’t an oil exporter any longer. Its output will absolutely collapse this summer, and the country lacks the funds to bring in foreigners to help restart it or the skills to do the work itself.
• Russian fields are in swamps and permafrost. Drilling is only possible during the winter. Any shut-ins means the wells freeze solid, necessitating completely new drilling. Last time this happened it took the Russians nearly 15 years to get production back.
• Azerbaijan and Kazakhstan are both dependent upon other countries (in some cases, Russia) to transit their crude to market. High production costs plus finicky neighbors equals long-haul shut-ins.
• Nigeria is a mess on a good day, and the supermajors who have made Nigerian output possible have steadily moved offshore to get away from the chaos and violence. Once they turn off their wells, they won’t even consider returning until global prices rise to the point that they are once again willing to subject their staff to frequent kidnapping. That’s several years off.
• Iraq has been in a state of near civil war for some 15 years. The country is now producing over 4mbpd, the income of which helps hold the place together. Negative prices will remove the “near” from the country’s political condition and (at best) make the place a ward of the Arab states of the Persian Gulf.
Some Charts We Are Watching
1) The theory that U.S. Covid-19 infection rates are tracking Europe with a lag continues to play out. A tentative hopeful sign as even Italy is starting to relax some of their restrictions.
2) Less hopeful is that U.S. infection rates are staying stubbornly high compared to Europe’s numbers post-peak.
3) Hopefully we are looking at a mid-May soft opening. Michael Cembalest at JP Morgan made the following observation this week:
“When might the US “reopen”? If we assume that the US has now entered the decline phase of virus (which is a big if), we can overlay recovery paths from other countries whose infection rates have declined substantially from their peak levels. Since the US has not conducted quarantine or contact tracing as broadly as China and South Korea, in my view those paths are not as relevant to the US. Austria and Germany are more likely paths for the US, with Italy as a low-pace outlier. Italy’s infection rate is still only 40% below peak levels, and has experienced the slowest pace of decline of all countries in decline mode.”
4) Even before Covid the election was going to have an element of ‘us vs. them’ about it. Post-Covid almost guarantees this.
5) You want to know who made the ‘oil trade of the decade?’ Harold Hamm’s wife, Sue Ann Arnall. Harold Hamm owns the shale exploration company Continental Resources and he and Sue Ann married in 1988. They divorced in 2012 and the final settlement was paid on January 5th, 2015, as you can see below. The settlement came to $974,790,317.77.
The 77 cents is cute.
Anyhow, Continental Resources stock price was as high as $81/share in August 2014. We obviously don’t know what date was used to value the couple’s assets, but needless to say, with the stock at $12.79 she’s probably glad she took cash and not stock.
6) Would you take the over or under on these ‘yes’ percentages? Obviously, it depends on your particular circumstances, but I’d be way over on the restaurant odds (no more leftovers!!!!) but could definitely skip a concert or sports event anytime soon.
Have a good weekend.
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