When oil goes negative: How did it happen, what it means for Indian economy

Oil producers are paying buyers to take the commodity off their hands.

The price of the US’ home-produced West Texas Intermediate (WTI) crude turned negative for the first time in history. Negative price in crude oil would mean producers paying buyers to take the commodity off their hands.

Here is a look at what the reasons for this decline in prices are, and its implications for India.
 

Why prices dropped to a historic low?
 

Prices dropped in the futures trade — where a buyer seals a deal to buy crude at a stated price at a particular time. A major reason for the decline was the move by traders to offload their holdings so as to avoid having to take fresh delivery and incur storage costs, given the May futures contracts were due to expire on Tuesday.
 

WTI prices were hovering around $18.52 a barrel at one point on Tuesday, recovering from Monday’s crash (to as low as -$37.63 a barrel). The benchmark price for US oil was over $50 a barrel before the virus outbreak, and the current fall has been caused mostly by the decline in global demand by one-third.
 

Following the lockdown in the US, less power usage by people led to the current fall in demand. Given the excess supply of crude oil in the market, prices started falling and storage capacities began running out. At Cushing (Oklahoma), a key storage hub, stockpiles have jumped 50 per cent to 55 million barrels since February, while storage capacity was around 75 million barrels.

What steps are being taken to revive demand?
 

A deal was reached by oil producers — Organization of the Petroleum Exporting Countries (OPEC), Russia, the US, and G20 member countries — to collectively slash global output by an unprecedented 10 million barrels/day, or 10 per cent.
 

However, the negative price indicates that this was too little to address concerns, given demand dropped by 30 million barrels/day. This means there is more oil in the world than it requires.
 

Will the drop in WTI price impact India?
 

Brent Crude is the benchmark for the rest of the world. In other words, nearly two-third of the world’s oil demand is for Brent, a low-density sweet crude.
 

According to the Petroleum Planning and Analysis Cell (PPAC), the Indian basket of crude oil represents a derived basket comprising sour grade (Oman and Dubai average) and sweet grade (Brent) of crude oil processed in Indian refineries, in the ratio of 75.5 to 24.5. WTI price may have some impact on Brent prices, in the long run.
 

What is the difference between Brent Crude and WTI?
 

Brent is a low-density crude, with low sulphur content (sweet), and hence is ideal for refining. It is extracted from the North Sea. On the other hand, WTI is extracted from land-locked regions in the US and is light in nature.
 

Brent prices are dependent on OPEC and its decision to increase or decrease oil supply. On the other hand, WTI is dependent on the production in the US.