By the time most Indians woke up on Tuesday morning, crude oil prices had fallen below zero for the first time in history. A negative price suggests sellers were paying buyers to take deliveries in a bid to avoid incurring of storage cost, as oil NSE -5.02 % demand crashed globally.
In overnight trade, May futures for US crude oil West Texas Intermediate (WTI) fell to minus $37.63 a barrel level, ahead of their Tuesday expiry. The trend was seen at a time when 90 per cent of the world is under lockdown and there is virtually no demand for crude oil. What happened?
The price of oil that we see reported is actually the future price of oil. So when we look at oil prices, we are actually seeing the market price for future months.
The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell into negative territory for the first time in history on Monday.
But that only related to the May contract, which was about to expire.
Traders holding the contract were unable to find buyers, because no one with the ability to take delivery wanted it.
"Nobody wants to take delivery of oil next month because, there's nowhere to store it, so the price dropped below zero," explained Rachel Winter, associate investment director at Killik & Co.
Storage issues?
The collapse in physical demand for crude products like petrol and jet fuel has left storage hubs at capacity or, as one trader put it: "They're close to the brim."
Storage at US oil hub Cushing has already grown to more than 15 million barrels in the past month - and is expected to soon be at capacity for the first time ever.
"Coronavirus is rewriting the rules of the global economy in front of our very eyes," said Adam Vettese, analyst at eToro.
"With oil demand virtually non-existent, this quite amazing sell-off is almost entirely down to fears over storage."
What will it do to the sector?
The biggest worry for the sector is the colossal imbalance in US supply and demand that underlies Monday’s flash crash. As the coronavirus lockdowns spread and unemployment rises, the US is now on its own producing 2m b/d more than its slowing refineries need, and lacks available storage to handle the excess, say analysts. Consumption has to leap higher, oilfields need to be shut sooner or new unknown storage capacity needs to be found faster.
Until the imbalance is fixed, prices will remain low and volatile, crippling the sector and forcing widespread distress on producers. The May contract’s capitulation is a nasty sign of a deeply dislocated market.
Is this the bottom or oil prices will fall further?
"Oil prices and associated equities in the sector will remain broadly weak over the near term," predicted James Trafford.
He said the supply cuts recently agreed by the Opec group of oil-producing economies were not likely to be sufficient to balance the market any time soon.
Opec is believed to be looking to cut oil output immediately, rather than waiting until next month, to ease the pressure on price.
"While Monday's negative WTI futures price might have been a one-off glitch, it does confirm there is trouble ahead," said Artur Baluszynski, head of research at Henderson Rowe.
It’s impact on India?
On paper, this would mean that, since India imports oil from the Organisation of the Petroleum Exporting Countries (OPEC) block, lower prices in international markets would also bring down domestic oil prices. However, this effect is not proportional or immediate.
The Indian government regulates oil prices. This is done to off-set fiscal deficit against the subsidies given to state-run oil companies. As such, over the base price of oil, government taxes are applicable, which can increase the retail cost for consumers.
With the current economic situation at a standstill and revenues at their lowest, the government may depend on lower oil prices to offset the difference. Thus, any benefit - even if extended to customers - would not be as drastic as the raw crude price fall.
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