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There might be not all bad for India, as Crude goes down below $0

  • WORLD
  • Jayant Gattani | Updated: April 23, 2020, 11:43 p.m.




In other words, sellers were paying buyers to buy the contract. The crude WTI, needs to be delivered physically at Cushing, Oklahoma (USA), whereas Brent crude can be delivered offshore in multiple locations. This is also good for the companies which uses crude or crude derivatives as raw material for their products.


crude-oil-facts_body_CrudeOil.jpg

In other words, sellers were paying buyers to buy the contract. The crude WTI, needs to be delivered physically at Cushing, Oklahoma (USA), whereas Brent crude can be delivered offshore in multiple locations. This is also good for the companies which uses crude or crude derivatives as raw material for their products.

For the last couple of days, there is a joke floating on the social media, “NOW YOU WILL GET CASH FOR FILLING PETROL TANK”, as good as it may sound, but this does not seem to be the fact. Let us understand what has happened and what is the road ahead.

For the 1st time in the history on Monday night, IST, the ‘Crude Futures’ went below $0 ahead of the expiry of the May Futures contract of US crude oil WTI. WTI stands for West Texas Intermediate, popularly known as Texas light sweet, is a crude oil grading term used for pricing of oil and setting a benchmark in the oil industry. In other words, sellers were paying buyers to buy the contract. First and foremost, let us be very clear that for India, it is not WTI crude which makes a difference, but it is price of Brent crude which must be seen.

• Now let us understand why this happened?

The crude WTI, needs to be delivered physically at Cushing, Oklahoma (USA), whereas Brent crude can be delivered offshore in multiple locations. Due to the global pandemic of Covid-19, all the countries are locked down and the economic activities are at stand still. So due to lack of demand and continuous supply of crude the storage tanks are about to full and there is less space to store the commodity. So, as the buyers will be unable to take the delivery because of the storage constraint the price of the futures contract went in negatives. It is also worth noting that the futures contracts for the month of June was still trading at more than $20. But it will be worth noting whether the June contract will trade at the positive or negative at the time of expiry.

It is a well-known fact that the crude oil prices have tanked over more than 50% since the beginning of this year. This sharp fall has been due to demand and supply mismatch at the global level. Where in the OPEC (Organization of Petroleum Exporting Countries) meeting Saudi Arabia, has decided to cut down its crude oil production and wanted other nations to do so. Russia had some other idea however, kept on operating and producing at the ongoing capacity. This led to a demand and supply mismatch owing to lockdown there was no demand for the crude oil and there was an abundance of crude oil.

This specific fall in prices of crude oil is good for the Indian economy as India imports 85% to 90% of its crude requirements for which there is always a problem of fiscal deficit. With the reduced prices India can fill up its storage space of crude and bring its fiscal deficit under control. This is also good for the companies which uses crude or crude derivatives as raw material for their products. On the other hand, companies which are involved in refining crude will have a negative impact on them due to falling oil prices.

It is also worth noting that crude as a commodity will still have some value irrespective of the Future’s prices. There is no chance that a commodity is extracted by the companies and they will also pay its buyers for purchasing the commodity.

Jayant Gattani is an established Chartered accountant and has given various views on ongoing economical and financial situation in the country.

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