Louisiana Voice

Louisiana’s Revenue Estimating Conference was rendered obsolete and the state’s finances thrown into a tizzy yesterday when the price of oil plunged to a negative $37.63 per barrel from the (adjusted for inflation) high back in 2008 of $148.93, a swing of more than $186 per barrel. Stephen Winham, retired State Budget Director, explains what it all means in his analysis below:

By Stephen Winham

If I offered to sell you 5,000 gallons of high quality gasoline (no ethanol)  at 20  cents a gallon, but you had to take all of it today, would you take it?  Before you say yes, ask yourself, “Where would I put it?”

Oil is traded as a commodity on the open market.  Traders buy contracts to take oil at a price guaranteed for a specific period of time.  These are futures contracts and they expire on a date certain.  If an oil buyer or trader cannot sell the contracts to purchase by the deadline they have to take possession of all the oil for which they contracted.  Current contracts for May delivery expire today (April 21).

A contango exists when the contracted price of oil exceeds the spot (current) price.  This, of course, makes the contracts valuable only if the buyer thinks oil prices will rebound enough to justify taking it at the contract price – and, equally important, if they have someplace to store it.  Because there is too much oil on the market with no place to put it, we entered the uncharted territory of, not just low, but negative prices.

Oil for delivery in May was being traded at over $18 per barrel Friday (April 17) and at $15 per barrel Monday morning. These were extraordinarily low prices, but by the afternoon sellers had to pay buyers $37.63 to take their contracts for May delivery.  Again, these contracts expire today (April 21). Traders holding oil futures were paying buyers to take contracts off their hands at the risk having to take physical delivery of the oil, which most are incapable of doing.  The only way traders can store oil is to lease facilities which are already at a premium because most are full.  It is possible there will literally be no available commercial storage space by the end of this month.

Monday’s crash, while shocking,  was temporary and some say largely technical because trading on May contracts was relatively light.  Most trading yesterday was on  oil set for June delivery. However, the effects and implications of the oil glut are real and have serious implications for both the near and longer range future.

OPEC has already agreed to production cuts and Russia and Saudi Arabia have supposedly agreed to do so in May. The U. S. government plans to buy as much oil as possible for storage in our strategic reserves. These things  should help, but prices for June delivery will settle in the low $20/barrel range.  Some oil producers, already suffering, cannot survive, even in the short run, if they have to sell that low.

Although December 2020 futures contracts are currently trading in the low 30s, that’s pretty low and the rise in actual prices is currently unpredictable because we don’t know when, or how fast, the negative effects on consumption of the coronavirus will let up.  Consider that oil futures traded at over $65/barrel as recently as January and it is easy to see why futures at $30 are a bleak prospect for producers.

To the limited extent we need it, we are enjoying low pump prices.  Nobody knows how long they, or some oil producers, will last.

[AN ASIDE:  This crash we are talking about is in West Texas Intermediate crude, the U. S. benchmark.  Not all oil futures contracts are negative.  Brent Crude (the European benchmark) futures contracts, though also going down, traded at over $25/barrel Monday, but storage is less an issue with Brent because it is stored in oil tankers that can travel anywhere in the world.]

“Whenever you start to think that the federal government under Donald Trump has hit a moral bottom, it finds a new way to shock and horrify.

Over the last few weeks, it has started to appear as though, in addition to abandoning the states to their own devices in a time of national emergency, the federal government has effectively erected a blockade — like that which the Union used to choke off the supply chains of the Confederacy during the Civil War — to prevent delivery of critical medical equipment to states desperately in need.”

—The New York Times Magazine, April 19, 2020,  on the problems experienced by states in trying to procure PPEs, frustrating—and unnecessary—roadblocks thrown up by the Trump administration which has threatened to seize shipments already paid for by states.

“Our supply-chain group has worked around the clock to secure gowns, gloves, face masks, goggles, face shields, and N95 respirators. These employees have adapted to a new normal, exploring every lead, no matter how unusual. Deals, some bizarre and convoluted, and many involving large sums of money, have dissolved at the last minute when we were outbid or out-muscled, sometimes by the federal government.”

—Excerpt from a letter published in the New England Journal of Medicine, April 18, 2020. [for those who don’t trust The NYT, the NEJM could hardly be considered fake news. And by the way, we thought price-gouging in times of emergency was illegal.]

“We’ve gotta re-open and when we do, the coronavirus is going to spread faster…So, when we open up and we’re going to have to, and somebody’s got to make the call, we got to be smart about how we do it. When we end the shutdown, the virus is going to spread faster. That’s just a fact. And the American people understand that.”

—U.S. Sen. John Kennedy, on the need to end the shutdown in an effort to stem the spread of the coronavirus.

Concentrations of population continue to be a hot spot for outbreaks of the coronavirus and the St. Tammany Parish Detention Center is the latest such facility to be affected, according to a statement issued by the St. Tammany Parish Sheriff’s Office on Saturday.

A prisoner has tested positive for COVID-19 after suffering symptoms earlier in the week and four others are now suffering from low-grade fevers, one symptom of the virus. They have been isolated in a quarantined housing unit and are awaiting results from tests, the sheriff’s office said.

A jail medical facility spokesperson refused comment on a report that the outbreak was more widespread than a single inmate. “We can neither confirm nor deny any information,” the spokesperson said. LouisianaVoice was referred to the sheriff’s office but a call to that office got only a recording saying the office was open on weekdays.

The facility houses 57 inmates and the mother of one inmate told LouisianaVoice that she was informed by her son that prisoners have no protective masks or gloves, items that are limited to employees.

But a statement released by the sheriff’s office said all CDC guidelines for sanitation are being followed by inmates and staff and that additional cleaning supplies and clothing and linen exchanges have been provided for all 57 inmates in the affected housing areas.

The inmate who tested positive was placed in isolation after he became symptomatic, officials said, adding that all other inmates in the same housing unit are being monitored and that they were having their temperatures checked twice daily.

Prisons, along with nursing homes, are considered to be ideal breeding grounds for the COVID-19 virus because of the necessarily close proximity to each other in confined areas.

More evidence [as if additional proof is needed] that Donald Trump is completely out of control, incompetent, imbalanced, and yes, unhinged—but most of all, dangerous:

“The president’s statements this morning encourage illegal and dangerous acts. He is putting millions of people in danger of contracting COVID-19. His unhinged rantings and calls for people to ‘liberate’ states could also lead to violence.”

—Washington Gov. Jay Inslee, in response to Trump’s irresponsible tweets of “LIBERATE MINNESOTA,” “LIBERATE MICHIGAN” and “LIBERATE VIRGINIA.”

“I think elements of what they’ve done is too much and it’s just too much.”

—Donald Trump, in justifying the tweets about restrictions imposed by the states in efforts to slow the spread of COVID-19—without expanding on what orders he thinks have gone too far. [The states in question have imposed restrictions that precisely follow the recommendations laid out by Trump’s own White House coronavirus task force last month that go by the name “The President’s Coronavirus Guidelines For America.”

“Every one of us has a role to play in winning this war. Every citizen, family, and business can make the difference in stopping the virus. This is our shared patriotic duty.”

—Trump, on Friday, in a typical [for him] mixed message, adding more confusion to the national dialog.

“As the governor of the commonwealth of Virginia I, along with my staff, are fighting a biological war. I do not have time to involve myself in Twitter wars. I will continue to do everything that I can to keep Virginia safe and to save lives.”

—Virginia Gov. Ralph Northam, when asked about Trump’s tweet.

“If he’s sitting home watching TV, maybe he should get up and go to work.”

—New York Gov. Andrew Cuomo, responding to another Trump tweet which said Cuomo should “spend more time ‘doing’ and less time ‘complaining.’ Get out there and get the job done. Stop talking!”