Why did WTI price fall to a negative and is this any good for India?
By: Aradhana Gotur
Tags: Low Crude Oil Prices, Coronavirus, Wti Futures, Current Events, Covid 10

Why did WTI price fall to a negative and is this any good for India? Aradhana Gotur Apr 23, 2020·3 min read

Folks, today we will discuss the historic plunge in WTI oil prices.



Had you ever imagined a time when oil sellers would pay buyers to get rid of their stock?



Eh, how’s that even possible?



But, hey it is happening now and we aren’t kidding!



Remember when OPEC declared a crude oil production cut to boost prices? If you don’t know about it, you may read it here for a better understanding of what’s happening and why.



Coming back to the point, so just over a week before, both OPEC and non-OPEC members agreed to cut oil production to prop up falling prices on account of the dampened demand for crude oil triggered by COVID-19.



Well, turns out, it did not help.



On Mon, the 20th Apr 2020, something historic happened in the oil market. So much so that it startled producers and investors alike and sent global benchmark indices diving.



Reason?

The May futures of West Texas Intermediate (WTI), an American benchmark for crude oil, fell 305% and closed at -$37! (we had given you a spoiler just in the beginning).

Why did the WTI price touch a negative?

No one has ever heard of the oil price dipping to negatives. So, what explains this unprecedented behaviour now? Let us examine the reason for this oil market crash.

Ever since COVID-19 set foot, the demand for crude oil was plummeting. What can you expect when people across the globe are locked down and industries are shut? With no to low demand for oil, the prices plunged significantly. A dampened demand for oil due to coronavirus’ impact created an oversupply of oil in the world. Now, it’s not like oil is air, right? Meaning, it needs storage space. And when millions of barrels of oil are accumulating because of low demand and consumption, oil needs more place to be stored. But the US has so much oil now that Cushing (Oklahoma) is running out of storage space. And refineries are charging a bomb, if at all they are willing to house the barrels. Literally, the entire world is facing storage woes. The WTI futures for May futures were set to expire on Tue and investors who held the contract were to take physical delivery of oil barrels. They simply can’t hold on to the WTI futures and refuse to take physical possession, right? But with no place to store physical barrels, investors were at their wits end, which forced them to go on a selling-spree. This means, investors literally sold their WTI oil futures contracts to avoid storage and price issues. No wonder why WTI oil futures contracts fell below the zero level and touched -$37!

What does the historic decline in crude oil prices mean to India?

Now, you may think that such a plunge in oil prices is good for India, given we are the world’s 3rd largest crude oil and 4th largest liquefied natural gas importer (we import ~80% of our crude oil needs). Note this, every $ rise in the price of oil adds ~Rs 11,482cr to our import bill, results in a balance of payments, and lowers the value of the rupee. Ultimately, fuel-dependent companies transfer such high costs to end consumers. Continue reading here.