A oversupply in the global energy market, shortage of storage capacity and COVID-19 pandemic induced lack of demand pushed the West Texas Intermediate (WTI) benchmark US crude oil to below $0 a barrel for the first time in history on April 20. In New York, West Texas Intermediate dropped as low as negative $37.63 a barrel. It’s far below the lowest level previous seen in 1946, just after World War II.
Since its origin the novel coronavirus has been surprising the world with various incidents. Let it be global economic slowdown, lay-offs, fluctuations in financial markets and what not. Of all these, nothing has been more jaw-dropping, since the Covid-19 pandemic broke out, than Monday’s collapse in a key segment of U.S. oil trading.
By the time most Indians woke up on Tuesday morning, the crude oil prices had fallen below zero for the first time in history. A negative price indicates that sellers were paying buyers to take deliveries in order to avoid storage cost. The oil demand crashed globally as the oil market was affected futures contracts which were about to expire later on Tuesday.
The price on the futures contract for the US oil market known as the West Texas Intermediate crude fell into negative price i.e. minus $37.63 a barrel. This means, the sellers were actually paying buyers to take the oil off their hands. The reason is that due to the pandemic affecting the economy, there is so much unused oil left that American energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.
Since the start of the year, oil prices have been falling down due to impacts of the coronavirus and a breakdown in the original OPEC agreement. As no one knew when the pandemic would be over, producers around the world continued to trade oil but now the contracts are going to end. Thus, prices crashed 300% from $17.85 a barrel to -$37.63 a barrel in a day.
As a result of their actions, the U.S. oil market has become oversupplied with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to coronavirus pandemic. A week ago, a new output deal by OPEC and its members to curb supply has resulted into this collapse in global demand.
There are signs of weakness everywhere. Even before Monday’s fall, buyers in Texas were offering as little as $2 a barrel last week for some oil streams. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.
With the May contract expiring today, the negative price means that investors holding the contract were unwilling to take delivery of oil and bear storage costs. Investors had to pay people to take the crude off their hands. The June contract still trades at over $20 a barrel.
Will this Price Crash help Indian Consumers to pay Less at Oil Pumps?
Not really. The price collapse will not reflect in a reduction in pump prices because the cost of the Indian crude is the average of Oman, Dubai and Brent crude. Pump prices in India are independent of this because a large portion of it is taxes. The government is also not realising the taxes because nobody is buying fuel due to lockdown and travel restrictions.
A director refinery of an oil marketing company explained,
"Retail prices of petrol and diesel in India are linked to the price of these fuels in global markets. So only when these product prices come off, will be see some impact on pump prices in India. Besides, with our tax component still high, the consumers may not get the desired relief."
He further added, “In India, it doesn’t have much impact simply because we are not going to buy much of crude, all our tanks are full throughout the country.”
Monday’s crude oil price collapse may not have much impact on Indian refiners or on pump prices at least till June. But it might spoil the prospects of oil giants such as Saudi Aramco investing billions to buy stakes in local refineries such as Reliance Industries Ltd, Bharat Petroleum Corporation or the planned mega refinery in Maharashtra.
Another executive at a state-run oil firm said, “Refineries will not see 100% utilisation at least either till May if not till June also. So, over the next two months we don’t benefit from the impact of rock bottom prices.”
State-run fuel retailers Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd switched to daily price revision from a fortnightly pricing system in June 2018 if pricing reforms. While fixing prices of petrol and diesel, Indian oil companies consider trade parity pricing.
The pricing is determined on existing prices of these products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. To the trade equal price, other elements like dealer commission, excise duty and value added tax are also added before selling to common people.
The demand is not expected to rebound soon. Oil producers would be forced to re-work their business plans due to the price plunge.The price collapse has impact across the oil industry. Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the U.S. are gaining pace.
On Wall Street, stocks crashed after US oil prices turned negative on Monday for the first time ever. Stock markets in Shanghai, Hong Kong, Tokyo and Seoul were trading with heavy losses in early deals.
The International Energy Agency also sees a drop of 29 million barrels per day in global oil demand in April which is the lowest level in 25 years, as many countries lock down and restrict travel to prevent the spread of the deadly coronavirus.
One of the casualties could be Saudi Aramco’s plan to invest as much as $15 billion for a 20 per cent stake in the oil to chemicals business of Reliance Industries Ltd which was announced in August last year. The plan could be postponed for indefinite period.
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Talking about recovery, the recovery is expected to pick up over the second half of the year when tight restrictions on travel are lifted, raising demand for fuels and oil. At the same time supply is expected to decrease due to the historic deal to limit oil production and the financial collapse of weaker oil companies.
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