I started my post-CA career in the United Arab Emirates and my second job was in Schlumberger, an Oilfield services company. If someone were to tell my younger self that Oil futures will not just go to "0" but get negative in my lifetime, I would have laughed it off. And yet here we are!!
The US crude oil benchmark, WTI for May delivery saw its price decline to -$37.63 a barrel on Monday, a day before its contract was due to expire. But this was not quite what it seemed like. On Tuesday, the price was back at $1.65 a barrel, as seen on MarketWatch.
How does it work and does it mean we get our retail Petrol/Diesel for free? And as importantly, even if it were, where are you going to go?
Speculators who had bought the Oil contract were expecting that Oil prices would go up higher and when it didn't, they were been unable to sell it or had no storage booked at Cushing to take delivery. The contract in question was coming up for expiry and those holding these contracts would have to take delivery of oil...imagine taking delivery of 1000s of barrels of Crude Oil!! They had no choice but to exit.
Oh yeah, couldn't they have just stored it, you ask? US storage space is rapidly shrinking. Storage units like the one at Cushing follow a dynamic pricing model. As you start approaching peak capacity, prices start rising disproportionately and when you inch towards the 100% mark, prices reach such exorbitant levels that you’d start thinking about building your own storage facility as opposed to using the one at Cushing. Ok, what about offshore floating containers on the coasts of Africa. People have been betting on the recovery for quite a while. So most of these supertankers are already rented. So you are not getting any space...PERIOD!
The declining trend in oil, therefore, is a symptom of the huge toll that the world economy is paying to protect people from the COVID-19 pandemic. For India, the downtrend in oil prices is indeed good news, since we are a net importer of oil and benefit from lower prices. With our economy shut down, the time to recovery and damage remain unknown.
India imports more than 83% crude oil every year for more than $100 billion. In fact, oil alone accounts for over 20 per cent of the country's whole merchandise imports. But the prices hitting negative territory in the USA won't mean much for us, the consumers.
India's entire crude basket represents oil from Oman, Dubai and Brent crude, not WTI. The prices that have made headlines for hitting negative are of WTI which is mostly relevant for the local US, Canada and Mexican markets. Brent crude, which is what India buys has also seen a fall of about 5%, but prices are still hovering around $27 a barrel, cheaper than before but nowhere close to 0.
Even if we were to buy WTI oil for free, India doesn't have enough capacity to store the oil, unfortunately. The total capacity available for storage is just 5.33 million tonnes (enough to meet 10 days requirement) and most refiners are at full capacity!! Also, 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!!
For now, the slump in oil prices only offers cold comfort!!
Source: Moneycontrol, Finshots, LiveMint, BusinessToday