Is it a building case of/for selling the news? Another substantial down day in the oil market brings the total slide to just more than 13% (since March 5). Hardly anything earth-shaking on its own, not with the WTI front month futures contract gaining an impressive 85% since the end of October. During those four and a half months, the news was all good (or so it seemed) beginning in the world of pharma (vaccines) and spreading to politics (elections and what that was going to mean for “stimulus”).

So, up 85% and then down 13% isn’t at all outside the realm of prudent profit-taking following such a huge, nearly-vertical run.

It’s easy to think about and make future impacts into whatever you want from them; vaccines end the pandemic, and then Uncle Sam comprehensively cleans up its mess writing enormous checks. But when all these things actually happen, no longer future tense, it’s understandable this tendency to take a little off the table to wait and see if the dreams really do match reality.

If this was all that’s going on WTI-wise, a price correction, then it might not be worth much more than passing notation (already did that last week). But our suspicions only deepen right at the front of the crude oil futures curve – to begin with, the front-end, one-month calendar spread refuses to backward-ate.

The few pennies of reappearing contango right at the start could have been a technical artifact of the April 2021 contract becoming more and more illiquid as it neared expiration. With it off-the-board today, however, the one-month calendar spread remains (now between the May and June 2021 contracts).

And if that was all for the WTI curve, too, maybe it’d deserve barely a tiny bit more than a passing notation; it’s not.

What really gets my attention is as much the rest of the curve; just how far – really how fast – the backwardation has been drained right out of it. The selling is quick and violent in the front over the last week because of this flattening. Like yields and money curves, shape so often means as much or more in them as nominal price.

The numbers are substantial; beyond the very front contango, backwardation has really shrunk since the profit-taking/selloff picked up last Thursday. The calendar spread out to the end-of-year December contract, for instance, had puffed all the way out to $4.38 back on March 11, since cut down by well more than half really in just a few trading days ($1.77 as of this afternoon).

The spread to June of next year has collapsed from $7.39 on the 11th to just $3.39 today. In the current session, March 23, the front CL1 (May 2021) was down $4.04 (as of this writing) while the December 2021 maturity lost “only” $3.03 (and June 2022 was -$2.32).

That’s a whole lot of potentially meaningful flattening.

But why? The vertical take-off October to early March had been pricing perfection. In preparation for most Americans becoming first $600 and now $1400 “richer” (as the media says), enormous “stimulus”, why not bid oil to the moon? After all, supply isn’t coming back online, at all. 

Now that the first one is nearly three months behind, and the second is happening, along with increased vaccination, the dreamy optimism grows murkier; a bit more complicated when, where, and how the rubber meets the road. As noted yesterday, for one, booming, cash rich-fueled recoveries aren’t checked so easily and thoroughly by harsh winter weather no matter how harsh and wintry; the Chicago Fed’s National Activity Index and its February -1.09 should call a solid halt to thus-far unchallenged assumptions.

Beyond that and other data, when it comes to the “stimulus” details there’s plenty of concern when the plan revolves around – to the point of being almost completely dependent upon – “I’m from the government and I’m here to help!”

To that end, research firm Alignable published yesterday some sobering survey results of small and medium businesses, the very economic segments both bearing the brunt of the current recession as well as being the places where normal recovery first buds and then blooms.

If we’re thinking about what it is, exactly, the federal government is trying to overcome, but hasn’t come close yet, it’s lost jobs because of this:

– 41% of SMBs have a month or less of cash reserves left (up from 32% last month)
– 49% of SMBs couldn’t pay March rent in full, on time (up from 38% in February)
– 74% of small business owners are struggling to receive PPP funds (though 26% say the PPP has been fast and easy).

Only 16% of surveyed small businesses claimed “they’re doing fine and have no worries about keeping their businesses alive.” Barely one in six, economywide.

The whole point of the PPP, and its recent expansion, was, as I wrote above, to smooth over these huge holes in the economy. Big businesses, those easily able to float liquid debt instruments no matter how unsavory and uncreditworthy simply because there exists a reasonable (today) market for them, they don’t have to worry about such lingering insolvency issues and thus don’t really need more rescuing (at the present moment). Small firms either go to banks (which don’t want to lend) or have to place all their hopes upon frictionless stipends and grants – the very thing government does worst.

Some of the comments were, well, chafing:

“The PPP loan is hard to get. We’re SO FRUSTRATED! We train first responders and may not make it!”

“2019 was not a great year. Last year was better for my carpet cleaning business, but now I don’t qualify for the PPP when I really need it. In the first two months of the year, I also had COVID. I lost a lot of jobs because of it, and now when I really need the PPP, they won’t give it to me. The system stinks.”

“This application is a total nightmare.”

Small (and medium) businesses worried about survival aren’t in any shape (or mood) to be hiring back the multitudes of workers they let go starting a year ago now. Therefore, with the labor market having remained utterly gutted, guess what Americans said in February they plan to do with the Uncle Sam’s latest helicoptered gift (via Bloomberg):

That’s 50% between saving and paying down credit card debt (same thing), while another 50% in on food and housing (mostly back rent, presumably). There’s just about as much indicated to chase Bitcoin as buy electronics, each of those only a tiny bit. Stimulus?

The huge, thirteen-digit numbers they throw around when describing these monstrous “rescue” packages don’t quite look the same in the fine print (which is what happened to the CARES Act, the last thirteen-digit “rescue”). In the neo-Keynesian DSGE models popular with Economists and central bankers (same thing), they don’t actually model this sort of granular detail, preferring instead to presume some outlandish yet uniform “multiplier” effect derived from overly simplified assumptions (“spend $XXX hundred billion on near anything, the calculations indicate it will boost the economy by 1.2836987563 times the headline”).

The same thing the mainstream argued both for (it’s going to work well; recovery) and against (it’s going to work too well; inflationary) 2009’s ARRA. Reality (it doesn’t work at all; continued deflationary) is never presented as an option and markets being imperfect do forget from time to time (what is, after all, reflationary?)

Stimulus and vaccines, very easy to picture things going perfectly, and then trading such perfection, before they really get going. If it was as easy as the DSGE models have all said for as long as econometrics has been around then there’d only ever have been, or would ever be, just one QE or one fiscal “rescue.”

If “they” gotta keep doing them over and over and over, that isn’t something to unquestionably swallow (inflationary!) it’s a pretty clear indication the last one, like all the other last ones, didn’t work. Or, at the very least, it doesn’t work so easily and effectively as it is “supposed” to. These things get complicated; at times like these, complicated isn’t good and it doesn’t space out $7 bucks in longer-dated WTI contango. 

Maybe oil right now is just taking a breath; too soon to say for sure. But as news of the rubber meeting the road, and the WTI curve flattens ever further maybe even edging more of it eventually into contango, you really have to question the fine print (again).

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