1. ANALYSIS
,Meaning of negative
crude prices and its
impact

2. The price of a barrel of benchmark U.S. oil
plunged below $0 a barrel on Monday for
the first time in history, a troubling sign of
an unprecedented global energy glut as the
coronavirus pandemic halts travel and
curbs economic activity.

3. What does a negative future price
mean?
The price of a barrel of crude varies based on
factors such as supply, demand and quality. Supply
of fuel has been far above demand since the
coronavirus forced billions of people to stop
traveling.
Because of oversupply, storage tanks for WTI are
becoming so full it is difficult to find space. The
U.S. Energy Information Administration said last
week that storage at Cushing, Oklahoma, the heart
of the U.S. pipeline network, was about 72% full as
of April 10.

4. Why did the prices fall?
The crude oil prices depend on demand, quality and
supply. 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.
Put simply in other words, the sellers are paying the
buyers. Oil traders are unwilling to take the delivery
owing to lack of storage space. In complete
contrast, 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

5. Impact on consumers
The crash in crude futures prices at Cushing
won't necessarily translate into a crash in prices
at the gas pump. Although The price of gas has
been precipitously falling around the United
States in the last few weeks as the oil industry
has been jolted. The national average price of gas
was $1.81 as of Monday, a $1.03 drop from a
year ago.

6. But crude oil is only the raw material from which
refineries make gasoline, diesel, jet fuel and other
products. And the price of crude — even if it’s negative
right now — only accounts for a fraction of the cost of the
gasoline or diesel you put in your car or truck, according
to the Energy Information Administration.
It costs companies like Exxon Mobil and Royal Dutch
Shell, which employ tens of thousands of people around
the world, a lot of money to refine oil and transport it to
gas stations. In addition, federal, state and local taxes
account for about one-fifth of what you pay at the pump
in the United States.

7. Impact on Airlines
For cash-strapped airlines, the decline in crude
prices will make it cheaper to operate flights that
are already nearly empty as people remain
homebound due to the coronavirus.
The plunge in crude futures also indicates
that the market does not expect airlines to add
back many flights to their slimmed down
networks any time soon.

8. IMPACT ON INDIAN ECONOMY
Since there are more settlement options for Brent crude
futures, their prices haven’t fallen as sharply. Even so,
Brent crude, which is the more relevant benchmark for
India, has dropped over 65% so far in 2020.
Still, with the ongoing impact of covid-19 related
lockdown, the gains from lower crude oil price get offset
to a large extent. “It is imperative to note that the current
fall in global crude oil prices is not a pure positive supply
shock, which benefits oil consumers like India (at the
expense of oil producers) but is also a result of a weak
demand induced shock and hence the positive impact on
growth gets somewhat offset

9. But India can be benefited in two ways First, the
oil import bill will fall sharply this fiscal year,
giving tremendous relief to the government on the
external account front.. With oil prices falling and
foreign exchange outgo reducing, the pressure on
the current account balance is off.
Second, India is quietly building up its strategic
reserves taking advantage of the cheap prices. India
has a capacity to hold over 39 million barrels of oil
at its strategic reserves in Vishakhapatnam,
Mangalore and Padur, near Udupi. These are
underground salt caverns converted and built to
store crude oil.

10. What will happen next?
Traders expect demand to recover by June as lockdowns
are lifted across the world and economic activity resumes.
Second, traders also expect that storage space may be
created as existing inventory is drawn down. America is
also talking of adding to their strategic storage by taking
advantage of the low prices. This could create demand for
oil. Finally, contract expiry for June contracts is still a few
weeks away, giving speculators that much more time to
speculate.
ANHAD KAMAL
22nd April,2020
SOURCES : THE HINDU AND ECONOMIC TIMES