Since the beginning of the year 2020, the economy has gone through major historic events whether it be the death of NBA legend Kobe Bryant, the spread of coronavirus, the impeachment trial of USA president, and other nation wise events.
21st April, 2020 was one such historical moment for the world. On one hand, where everyone is fighting against coronavirus, the prices of the WTI crude oil had fallen to negative $37 per barrel.
Whether we as an individual be benefitted from the news of negative crude oil price or does it put the economy in a disadvantageous position?
First, let us understand what is “Negative crude oil price”.
We often think that the major factors for determining the price of any commodity is the market’s “demand” and “supply”. The same is prevalent in the case of WTI crude oil. However, in this case another major factor that has affected the price is “storage capacity”.
To buy any commodity, an individual has an option either to buy at the current market price or at a predetermined rate in future month by entering into a futures contract. A person enters into a future contract either to hedge their risk through taking physical delivery of the commodity in the future month but at an agreed rate or to speculate in commodity by making cash settlement which does not include physical delivery.
The problem occurred when the demand for crude oil decreased (due to coronavirus) so much that there was no buyer on the other hand. And the speculators, who aimed at settling the financial difference between the buying price and the settlement price, had no other option than to take physical delivery of the May contracted oil. The speculator may not have a refinery or storage facility where crude oil could be stored. So now even if the speculator takes the delivery, where will they store the barrels of oil? This is where the factor of storage has taken the front seat and became a driving force behind the pricing of crude oil futures.
The speculators had to pay someone to store the barrels of oil until the demand for the same is increased. Therefore, making payments to take oil has led to a negative oil price. If the speculators had proper storage capacity, then the economy would have never seen such type of situation.
All this transaction has taken place between the producers and the intermediaries which will not affect the end customer.
Therefore, we individual consumers aren’t going to be benefitted from this transaction.
Now let’s see how will this affect the Indian economy.
There are three benchmark oils depending on their quality and location – Brent, WTI, and Dubai/Oman. India is one of the biggest importers of crude oil and cooking gas which is supplied from diversified sources. India imports Brent oil from Iraq and Saudi Arabia, which is the main source of supply.
The decrease in WTI crude oil price shall have a low impact on the Indian economy as India is not a major importer of WTI crude oil. Also, the negative price of WTI crude oil was only for May Future contract, the June delivery futures are still trading in positive territory at $20+/BBL.
How does this situation affect the environment?
Negative oil price means that US crude oil producers are not facing a glut and if they don’t stop drilling, they will have to give the oil away free and/or pay people to buy that oil. If this oil could not be sold, then they may opt for dumping or disposal. However, this will cause an environmental disaster and result in billions of dollars of penalty.
It is always said that excess of anything is dangerous. Hence proved!.