Zillow Market Pulse: April 20, 2020

April 20, 2020

Oil prices turn negative for the first time ever, as storage capacity continues to dwindle. Additional relief for small businesses gains momentum in Washington, despite reports of unequal lending practices. And the surge in unemployment places major strains on states' funding capabilities. 

• Oil prices turn negative for the first time in history

  • The price of the May futures contract for WTI crude oil fell below $0 for the first time since the series began in 1946.
  • The fall to negative territory is more a reflection of a shortage of storage capacity, rather than fractured market fundamentals.

• The federal government inches closer to offering more relief for small businesses

  • An additional $300 billion aid package is expected to be voted on this week.
  • Reports suggest that large and/or publicly-traded companies received aid from the ~$350 billion package that was purportedly for small businesses only and has since been exhausted.

• A historic surge in unemployment poses major challenge to state funding

  • A report shows that almost half of states have seen their trust fund balances fall by at least 10% since the end of February.
  • Funds in New York and Massachusetts have fallen by half.

So what?

Today's headline oil price figure will generate attention, but there is far more to the story than meets the eye. To be sure, the market is struggling. Stay-at-home policies and health concerns have significantly softened demand for oil and left a severe excess supply. But most all, storage space has become incredibly difficult to find, which is the main reason behind today's historic price movements. Billions of dollars' worth of oil futures are traded each day and the contracts are almost always settled financially before expiration. But if a contract hasn't been closed out after the expiration date, physical delivery of oil must be made. Those trading May crude oil contracts – which are set to expire tomorrow – made it vehemently clear that they did not want to be stuck with an open deal, not to mention the physical oil. Comparatively, futures for June and July contracts remain low by historic standards, but have fallen much less than the price of May contracts in recent days. What's more, investment in oil exchange traded funds saw a record increase last week. Taken together, these suggest that, while the industry continues to struggle with waning demand, longer-term fundamentals remain solid. Put simply, a barrel of oil today costs less than zero dollars, but one in August costs nearly $30. 

Despite ongoing differences in Congress, it appears that there is some positive momentum gathering for a new deal aimed specifically at helping small businesses. Discussions in the House and Senate appear to be progressing and an additional $300+ billion in relief will be voted on later this week. This development is welcome news to small businesses that saw the initial phase of relief offerings get swept up very quickly, with certain companies bearing the most fruit. A report released today suggests that many of the recipients of the initial program were publicly traded companies, some of which also qualified for the Federal Reserve's Main Street Lending Program aimed at supporting mid-sized businesses. Many large loans were made, offering further evidence that larger companies received an outsized share of the relief. According to data from the Small Business Administration released Friday, loans of more than $1 million accounted for 4% of applications, but nearly 45% of the approved money. Additional relief will be warmly received by small businesses, which employ about half of the nation's workforce.

 Lastly, the much-discussed surge in claims for unemployment assistance has made a major dent in the reserves of some states. Unemployment benefits are generally paid out by states' trust funds, which are a sufficient source of funding for these programs in normal times. But with the historic surge in unemployment over the past month, the resources in these funds are being put to the test. From the end of February through the first half of April, New York state distributed about 50% of the money it had available. California's trust fund balance has fallen about 40% since February. The shortfall opens up the possibility that these states could be out of funding to meet the surge in unemployment, should the slowdown in the labor market persist. Perhaps in anticipation, New York recently applied for a $4 billion loan from the federal government in order to ensure it can meet these obligations. While these types of loans could be a boon for states in the short term, it opens up the question of how this money is going to be paid back once the crisis comes to a close.

 

 

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