Govind Hari Lath
For the first time in history, the international crude oil prices have fallen below zero at a time when almost the entire world is under lockdown to combat Covid-19 and there is practically no demand for crude oil with the US benchmark crude, West Texas Intermediate (WTI) May futures sinking to a record minus $37.63 per barrel. The prices dropped by almost 300 percent. Negative pricing implies sellers are paying buyers to take deliveries in a bid to avoid incurring of storage cost. The previous lowest price was after World War II. The main oil storage terminal in Cushing, Oklahoma is nearly full owing to abundant US production but the refineries slowing their output.
How did Oil prices fall below zero?
Even much before this epidemic has taken its way and countries worldwide started going into lockdown, the crude oil prices have been falling. It was near to $60 a barrel at the start of 2020 and by March end, it was closer to $20 a barrel. This has been the trend more or less since the USA became the largest producer of crude oil in 2018 and thereby the supply continuously becoming more than the demand.
Historically, the oil market and the prices was controlled by the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia (which accounts for 10% of the global demand). Recently, the OPEC+ has been working with Russia, to fix the global price and supply but early March this year, the concord came to an end as there was disagreement between the duo over production cuts and the requirement for keeping the prices stable.
As a result, oil exporting countries started undercutting each other on price although continuing to produce the same quantity and this was followed by the outbreak of coronavirus, thereby reducing the economic activity and overall demand. With this, the supply-demand mismatch aggravated all through March and April resulting in all the storage capacity getting down to their limits.
Impact on India:
Brent crude, a low density crude, ideal for refining is the international benchmark pricing used by the OPEC, while WTI crude is a benchmark for US oil prices. Since India imports primarily from OPEC countries, Brent is the benchmark for oil prices in India too. Although WTI crude is cheaper compared to Brent crude, but India prefers Brent crude because the loading, inland movement and a longer ocean voyage involved in buying American crude oil narrows down the price difference.
However, Indian consumers would barely gain from the drop in crude prices as the government increases its excise duties and taxes to supplement its revenue collections and keep a balance on current account deficit, which prevents any sharp decline in retail prices.
The extended Lockdown in India has also plunged the demand of Petrol and Diesel by almost 60 percent and also with no air travel, the Aviation Turbine fuel (ATF) demand has also come down drastically by 90 percent so there is no point in importing more fuel at a time when there is very less demand as well as considering the fact that India has a very low storage capacity called Strategic Petroleum Reserve (SPR) of 37 million barrels which is equal to 13-16 days of usage.
Also, as previously highlighted the price of fuel in India is based on the average of prices of Brent, Dubai and Oman crude prices, which is trading at an average of $25.57 a barrel with just a 9 percent slide and WTI price is not a factor on it. Therefore the negative pricing in the USA market will not have any impact on the Indian market.
Conclusion:
This epidemic has rapidly evolved from a global health crisis to a financial one and the world leading oil producing countries are facing the heat. With the onset of almost 80 percent manufacturing units in China, and most of the countries gradually planning to start their industries in a phased manner in a bid to revive the economy, hopefully there will be a surge in demand again soon.