Weekly Economic Update For April 27, 2020

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Traffic is getting heavier, MN is opening up starting Monday, lets hope we are past the worst and get back to a semblance of normal soon.

This past week was not kind to the domestic oil industry.  The May crude delivery contracts fell as low as a negative $37.00 for a barrel of oil.  The world has never seen a usable commodity fall into negative territory.  The reason has been building for over a month.  Crude supplies in the market have been growing for some time, week after week.  Back on February 9 crude oil supplies grew by 7.45 million barrels.  The growth subsided for about a month then shot up to 7.6 million barrels.  As supplies did not drop over that month, the excess capacity was pumped into storage.  At the end of February oil was selling in the low $50 range.  Then came March. The first two weeks were not bad, but supplies continued to grow.  By the 23rd demand dropped off drastically world wide as travel of any kind went virtually to zero.  Oil supplies grew in one week by 13.8 million barrels, then 15.1 million barrels then peaked in growth in early April at 19.2 million barrels.  Over three weeks oil supply requiring storage rose by 48.7 million barrels with limited demand.  Open storage all but disappeared.  Wells could not be capped fast enough and last week another 15.02 million barrels were added to the glut.  The industry has used up virtually all available storage sources including tankers world wide now anchored off shore.  Russia, Saudi Arabia and other producers are arguing over the amount to cut when in actuality they could all stop producing for over two months and we would barely make a dent in the supply.  Now June crude delivery is down to less than $14 and could follow into negative territory.  The price is not expected to rebound anytime soon as demand world wide for air travel, regular commuting, or demand for allied products made by oil continues to be pitifully low.  It will take some time to use up the supply we have which will mean that the US Domestic oil industry is not going to get better until 2021 or later.  A case in point, US Crude oil rigs fell this past week from 504 to 438.  Since March 9 the US has shed 245 oil rigs accounting for a 36% drop overall.  That is huge.

Congress passed a replenishment of the PPP this past week.  The first funding of course was oversubscribed leaving 80% of small businesses shut out.  From a look at the numbers, smaller community banks provided the bulk of the total number of approved applications.  It was the larger banks that had larger borrowers with larger individual loan amounts.  Regardless, the smaller banks were able to catch the big banks flat footed, they were more nimble in the process, faster to finish the applications and spent the man hours to make sure they provided the best service for their client base.  Clients at the big banks were frustrated, angry and realized quickly that they had been left out of the process.  It took some time but with this second round of funding, I am hearing the big banks are ready this time and have a pipeline that will likely overwhelm the system quickly.  After this crisis is past, calling on the larger bank clients makes a great deal of sense as the frustration level is high.

The great recession was magnified due to the mortgage crisis.  Typically mortgage delinquencies are well under 1%.  During the great recession, poor loan structure, people who over bought and other factors drove the delinquency rate well over 3%, even near 5% in some sectors as foreclosures soared.  Congress recognized that with the job loss figures, a repeat of the mortgage crisis was bound to occur.  Part of the stimulus package allowed for home owners to enter into a forbearance agreement to defer mortgage payments, including taxes and insurance, tacking them on to the end of the loan.  Loan Servicers were to make the bond holders whole as well as front the insurance and taxes.  As of last week 6% of all mortgages are now in some sort of forbearance agreement.  That exceeds the level of delinquencies that occurred during the great recession.  Hopefully this forbearance period will alleviate the crash we saw in 2007-2009 and allow for a smoother, shorter recovery when things begin to fully open up again.  It should avoid the massive amount of foreclosures that occurred in the great recession.

Have a great week.



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