Negative Prices Come to the Oil Market

Well, now I’ve seen everything. I warned not long ago that the oil market was in for more pain. But I wasn’t expecting to see oil prices actually turn negative, which they did on Monday.

Granted, it was only the May futures contract for West Texas Intermediate that managed to trade below $0. WTI futures for delivery in later months managed to stay in positive territory. As did Brent, the crude benchmark most cited outside of the U.S.

Still, sellers paying borrowers to take their oil is not something we’re supposed to see. After all, it costs money to pump oil out of the ground. And it’s hard to think of a commodity more critical to our modern, industrial society.

But there it was: -$40.32 per barrel at one point in Monday trading. What the heck happened, and what comes next for oil?

Basically, traders drove WTI into negative territory out of fear that there would be no place to store oil scheduled for May delivery in Cushing, Okla., where the contract is physically settled. The coronavirus pandemic has slashed global oil demand by somewhere around 30%, but production remains near its normal level. All that surplus crude needs somewhere to go, and the world’s storage tanks and oceangoing oil tankers are filling up fast. Paying to avoid having to take delivery of unwanted oil briefly made financial sense in some cases.

Normality has since returned to the market, with June WTI futures trading near $17 per barrel: Still cheap, but at least above $0. (It’s hard to believe that, as recently as January, WTI was at $63. The current price is lower than what was seen at any time during the Great Recession of 2008-09.)

Can prices go lower still? I think so.

Think of the current oil market as a race between producers trying to curb output, and the remaining oil storage facilities, which are getting close to full. Can producers cut fast enough to avoid having literally no place for surplus crude to go?

OPEC and its allies have agreed to cut their combined exports by nearly 10 million barrels of oil per day starting in May. In normal times, that would be a massive decrease. But world oil demand, normally close to 100 million barrels per day, is probably closer to 70 million now because of the hit to global travel and economic activity. So even OPEC’s cuts leave plenty of extra oil. Meanwhile, U.S. output has started to fall, but so far, only by a small amount. Bigger cuts somewhere, by someone, are needed to keep crude stockpiles from growing further and potentially spilling over.

Oil demand should start to recover once the worst of the public health crisis is past. But how soon will that be? Soon enough to start soaking up all those extra barrels of oil? And even as energy companies shut down drilling rigs or cap existing wells, can supply fall fast enough to match anemic demand?

It’s an open question. But the fact that it even has to be asked means that oil markets will stay extremely volatile. If production continues to vastly exceed demand for another couple of weeks, the glut will get considerably worse. And traders will find themselves in the same position they were in this week: Nervous about owning the rights to a commodity they can’t sell or store. Prices may not go negative again, but don’t be surprised if they flirt with $10 per barrel before the worst is over.

Perversely, weak demand and low prices today could lead to a price spike at some point later, when world oil demand recovers. Capped wells can be difficult to restart. New wells that would have been drilled and meeting future oil demand aren’t getting drilled now. OPEC may be reluctant to quickly resume normal exports as prices rise.

Basically, the only constant you can count on in this oil market is rapid change.

Cable TV Struggling in a World Without Sports

The coronavirus crisis is accelerating the already gradual demise of the cable industry.

A lack of live sports is fueling the industry’s nosedive. Sports programming is one of the top reasons Americans subscribe to cable. But with professional and college sports indefinitely sidelined, customers are reevaluating the value of their cable subscriptions. Continue reading “Cable TV Struggling in a World Without Sports”

Can OPEC, Russia Deliver?

All eyes in the oil market are on OPEC and Russia as we wait to see whether they can agree on huge production cuts in response to plummeting global oil demand. The outcome of that meeting, and whether the concerned parties actually stick to their production quotas, will determine whether oil prices keep rallying or sink back toward their recent lows.

As a quick refresher of just how deep a bear market crude oil has fallen into: West Texas Intermediate traded as high as $63 per barrel in January and then dropped all the way to $20 in late March. That was the cheapest WTI had been in about 18 years. But crude has since rallied to about $24 on hopes that the world’s major oil exporters will slash their output.

One thing is for sure: Oil prices can’t rise without enormous production cuts, because global energy demand has fallen off a cliff since the coronavirus pandemic hampered travel around the world. In its latest weekly report, the Department of Energy reported that the U.S. consumed only about half as much gasoline as it normally does. Ditto for jet fuel. (Diesel consumption remained strong: A reassuring sign that food and other critical freight is still being shipped around the country by truck and train.)

The global economy consumes roughly 100 million barrels of oil each day. Or it did, before COVID-19 struck. Now, estimates of global demand are dropping fast. OPEC’s secretary-general said that “the supply and demand fundamentals are horrifying.”

Reports from the ongoing negotiations indicate that OPEC, Russia and other oil exporters are closing in on hefty cuts, totaling millions of barrels per day. Agreeing to such a drastic cut and then actually sticking to it will be a challenge for countries whose budgets depend heavily – in some cases, almost exclusively – on pumping and selling oil. If they can do it, don’t be surprised if WTI continues its recent rally. But don’t expect prices to return to “normal” anytime soon. The gaping hole in global demand is just too big for that.

And if OPEC and its allies fail to deliver on agreed cuts, look out below. The world is running out of places to store excess crude during a time of extremely weak demand. If the flood of excess production continues, you’ll soon hear talk about oil prices in single digits.

What Businesses Need to Know About Emergency Loan Options

Small-business owners will be able to get loans under the stimulus bill this week. President Trump signed on March 27 the Coronavirus Aid, Relief, and Economic Security Act. The legislation provides a stimulus package worth approximately $2 trillion. The CARES Act expanded certain loan programs administered by the Small Business Admin. It also created a new SBA program to help small-business owners affected by the coronavirus outbreak. The loan programs all have different purposes so small businesses will have to compare what option works best for them.

The bill established a new $349 billion program to help smalls keep their workforce on the payroll. The Paycheck Protection Program will provide capital to small businesses without collateral requirements, personal guarantees or SBA fees. All loan payments will be deferred for six months but will accrue interest during this period. The SBA will forgive the portion of the loan that is used to cover the first eight weeks of payroll costs, rent, utilities and mortgage interest. Businesses must keep their workforce largely intact during that period to qualify for loan forgiveness. No more than 25% of the forgiven amount can be used for non-payroll costs. Loans can be for an amount 2.5 times the borrower’s average monthly payroll costs for a maximum of $10 million. The interest rate will be fixed at 1% (You can find more information about the program here. The loan application form for borrowers can be found here).

Many small businesses will likely qualify for Payroll Protection loans. Businesses and other employers must have been in operation on February 15, 2020, to qualify. Small businesses, nonprofits, self-employed individuals and veterans organizations with 500 or fewer workers can apply for the loans under the new program.  Some businesses with fewer than 1,500 employees in certain industries may qualify, too (click here to see more information about the SBA’s size standards). Businesses that have pending or existing SBA disaster assistance loans can still receive funding through the Paycheck Protection Program as long as the loans aren’t used for the same thing. A single business can only apply for one loan under the program, but owners with multiple business entities can apply for each of them separately. Small business owners can begin applying for PP loans on April 3. Independent contractors and people who are self-employed can begin applying on April 10.

Some lenders will have to become certified by the SBA before they can participate in the PP program. Because the anticipated response is greater than anything ever experienced by the SBA, the agency will allow lenders that don’t currently participate in any of its loan programs to process and service these loans. Federally insured banks, credit unions, farm banks and a broad range of nonbanks can participate in the Paycheck Protection Program, but they must be certified by the SBA first. The loans will come with a 100% guarantee from the SBA. The agency will speed up the certification process. Lenders have the authority to approve loans on the spot so folks can get their money on the same day. Lenders will be compensated by processing fees paid by Uncle Sam. (You will likely have to open an account at the bank where you applied for the loan if you don’t already have an account there.)

For businesses that need a quick infusion of capital to cover expenses right now, a disaster loan and an emergency grant could help. The CARES Act broadened the existing Economic Injury Disaster Loans program maintained by the SBA. The CARES Act significantly expanded the disaster loan eligibility and can provide emergency cash advances that may qualify for forgiveness if used for paid leave, payroll maintenance, meeting higher supply chain costs and other qualified expenses. Those applying for a disaster loan can also receive a cash grant of up to $10,000 within three days of applying for the loan. There are restrictions on businesses that receive the loans. Small businesses must apply for the loans directly with the SBA. See  https://disasterloan.sba.gov/ela/

For those needing help to keep up with payments on your current SBA loan, the agency’s Small Business Debt Relief program could help. The program provides immediate relief to small businesses with non-disaster SBA loans, such as the SBA’s 7(a) and 504 loans, and microloans. Under the program, the SBA will cover all loan payments on existing loans, including principal, interest and fees, for six months.