Guru Gyan
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Guru Gyan

Negative prices, oversupply, no storage space: The actual turm-oil

West Texas intermediate (WTI) crude prices fell below zero for the first time in history on Monday, it didn’t just stop there.. the U.S. crude oil prices tanked overnight to a negative level of -$38 per barrel.

Does this mean you will be now paid to buy oil? One would wish!

The real story

The WTI May *futures contract that is due to expire on April 21 (Tuesday) tanked to the negative level due to over-supply of crude oil with almost no demand amid the ongoing Covid-19 pandemic. The oil storage spaces in the U.S. have almost filled up and the crude stockpiles at Cushing in Oklahoma which is U.S’ key storage hub is also running out of the storage capacity.

*Futures contract is an agreement to buy/sell an asset at a future date at an agreed-upon price.

After the contracts’ expiry, the holders of the contracts have to take the physical delivery of oil. Investors did not want to possess oil and incur storage costs, hence the panic selling.

Chart depicting WTI Crude movement in a month and the sharp downtick on April 20 (Source: Bloomberg)

The misbalance

The recent deal between OPEC, Russia and the U.S. agreed for an overall oil production output cut of 9.7 million barrels per day starting May 1. Also, producers would have worried that shutting down their fields, wells, production would be a damage for a long run with no idea of when the recovery happens and consumption comes back to normal.

Therefore, no such shutdown of oil production during the recent period has kept the supply side as wide as open, whereas the demand around the world for the same has been sinking amid lockdown and crisis.

The consumption end

The U.S. consumers will probably save some money on their monthly fuel purchases, but the drop in crude oil prices may not immediately reflect at gas pumps in the U.S. Also, the June contract was hovering around $20 per barrel whose expiry is a month away, so very likely investors may be buying those contracts.

Now for India, Brent crude price is the international benchmark price used by the Organization of Petroleum Exporting Countries (OPEC), whereas WTI crude price is a benchmark for U.S. oil prices. India’s oil prices benchmark is Brent as it imports primarily from OPEC. Thus, it would not impact the prices of the Indian consumers & companies as such as Brent prices were trading around $18 level.

The WTI Crude recovered slightly in Tuesday’s morning trade but was still in the negative territory.

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