A barrel of crude oil cheaper than a bottle of coke, but, India has nothing to cheer

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Updated: Apr 21, 2020 9:47 AM

The coronavirus pandemic has acted as a catalyst for jaw-dropping movements in global financial markets, however, nothing can be compared with the mammoth fall in the WTI crude oil price on Monday.

The Indian basket of crude oil represents the average of Oman, Dubai and Brent Crude. The pricing of Brent Crude is influenced by the decisions taken by the oil cartel, OPEC.

The coronavirus pandemic has acted as a catalyst for jaw-dropping movements in global financial markets, however, nothing can be compared with the mammoth fall in the WTI crude oil price on Monday. The West Texas Intermediate (WTI) Crude, produced by the United States, on Monday saw its futures contracts for May tank way below zero to negative $40.32 a barrel. The fall trumped the previous low witnessed in 1946, just after World War II. However, it is nothing to cheer for India because the WTI Crude is different from the oil that India consumes — the world benchmark Brent Crude, which is still trading at $25.34 per barrel.

The Indian basket of crude oil represents a blend of Oman, Dubai and Brent Crude. The pricing of Brent Crude is influenced by the decisions taken by the oil cartel, OPEC. Organization of the petroleum exporting countries or OPEC is an organization led by Saudi Arabia, consisting of other middle eastern oil producers. The price of Brent crude has not plummeted as OPEC along with allies decided to cut production earlier this month, in line with the fall in demand. For OPEC the good news is that demand from China, the world’s biggest importer of crude oil, has started to recover, as the country starts to get back on its feet, helping Brent crude. “Brent crude prices are trading at about $25/bbl. The reason for this sharp divergence is that WTI needs to be physically delivered at Cushing, Oklahoma whereas, for Brent contract, deliveries can be done offshore at multiple locations,” said Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking Ltd.

Sachdeva added, It’s a grim situation, playing out in the oil markets grabbing eyeballs of the entire investor fraternity and defying logic. The absolute collapse of WTI prices is primarily owing to the expiry of May WTI contracts, alongside the significant demand destruction due to lockdowns in several countries and supply glut in oil markets,” she said. In simpler terms, buyers of the WTI Crude are running out of storage space for crude oil, and storage costs space. Under such circumstances, sellers are paying buyers who are unwilling to take delivery. It is important to note that the slump in price is for the May futures that expire on Tuesday; the June contracts are still hovering around $20 per barrel.

With the Asian markets opening, oil prices jumped back up to trade at $1 per barrel. With one-third of the world population being told to stay indoors the demand for crude oil from refineries is not expected to rise anytime soon. If demand from China stays steadily increasing the demand for crude oil.

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