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Historic meltdown in oil prices signals world heading for recession

A day after the West Texas Intermediate crude for May delivery saw the first ever sub-zero dive on concerns that the US will run out of storage, global benchmark Brent crude plunged to near two-decade lows on Tuesday. (Photo: Reuters)Premium
A day after the West Texas Intermediate crude for May delivery saw the first ever sub-zero dive on concerns that the US will run out of storage, global benchmark Brent crude plunged to near two-decade lows on Tuesday. (Photo: Reuters)

  • Nation caught in the middle of a global downturn as oil prices plummet and US crude futures slip into negative territory for the first time ever
  • The cost of Indian basket of crude, representing the average of Oman, Dubai and Brent crude, was $20.56 a barrel on 17 April

NEW DELHI : The historic collapse in oil prices accelerated on Tuesday, leaving oil traders reeling, even as the economic pain spread to major producers of the commodity and stocks, threatening to tip the sluggish global economy into a deep recession.

The world’s most important commodity, also known as black gold, lost all value as the US ran out of space to store oil with the coronavirus pandemic sapping demand for fuel around the globe. On Monday, oil traders sent the WTI crude prices into negative territory in a desperate bid to avoid having to take delivery of actual crude oil, a produce that nobody needed or had space to store.

The devastating day ended with traders willing to pay $37.63 a barrel just to get the crude off their hands. The contract had ended trading at $18.27 on Friday.

WTI is the world’s most traded financial oil contract, a benchmark followed from Zurich to New York to Tokyo. But when each month a futures contract nears expiry and traders roll their positions into further-out contracts, the real, physical world of WTI becomes very small—centred on Cushing, an oil town in Oklahoma where a massive hub of pipelines and storage tanks serves as the actual delivery point for barrels. Prices recovered on Tuesday, but were still trading at $3.73 a barrel at 9.04pm India time.

Tuesday also saw Brent crude prices plunge, although the price collapse was nowhere near what happened in the US a day before. Brent was trading at $19.90 per barrel.

“The sharp decline in crude oil prices...was a result of panic selling of May-20 delivery contracts a day before its expiry, failing which the delivery would have been necessary amidst covid-19 related demand destruction and the storage constraints at Cushing. However, WTI futures for June-20 as well as ICE Brent for May-20 are trading at $16/bbl and $21/bbl, respectively," state run Indian Oil Corp. Ltd said in a statement. Low energy prices could put a majority of US shale oil producers out of business in the run-up to the US presidential polls in November. President Donald Trump responded to the negative prices at a White House press conference Monday, with plans to fill the spare space in the strategic petroleum reserve.

“Negative oil pricing has become a reality—and with it comes the lowest price (in real terms) in the history of the oil industry. The previous record-low price—East Texas crude at $0.10/bbl in 1931 ($1.70 in 2020 terms)—is now in distant second place," IHS Markit said in a statement.

The meltdown in crude oil prices is symptomatic of a deep malaise in the global economy, which is expected to enter recessionary zone in 2020 as countries have shut down normal business activity to fight the covid-19 pandemic.

The depressed energy prices comes despite the largest ever output cut by the Opec+, including Russia.
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The depressed energy prices comes despite the largest ever output cut by the Opec+, including Russia.

Low energy prices, however, bring good tidings for major consumers such as India as it helps in managing inflationary and fiscal pressures. But this time, an extended nationwide lockdown has led to a collapse in domestic demand. “The negative price has no direct impact on India. India’s prices are driven partly by another benchmark, the Brent, which is still trading at $25/barrel. Therefore, the retail price of fuels in India are unlikely to fall," said Amit Bhandari, fellow, energy and environment studies, at Mumbai-based think tank Gateway House.

The cost of the Indian basket of crude that represents the average of Oman, Dubai and Brent crude was $20.42 a barrel on 20 April, according to the Petroleum Planning and Analysis Cell. The cost of the Indian basket of crude, which averaged $56.43 per barrel in 2017-18, registered an average of $54.563 in February and $33.36 in the following month.

India must leverage and accumulate stocks to the extent possible, which will help to lower the trade imbalance and narrow its current account deficit, said Madan Sabnavis, chief economist at Care Ratings.

“This should provide support on the fundamentals side for our currency. It should soothe inflation, too, which will be useful as food prices will be sticky in the upward direction. Low crude oil prices is also a worry for the government as tax revenue of both the centre and states will get affected. Therefore, in short, a mixed bag for Indian economy," Sabnavis added. India’s benchmark Sensex index was down 1,011.29 points, or 3.20% to 30,636.71 on Tuesday, while the Nifty index was down 280.40 points or 3.03%, to 8,981. India, the world’s third-largest crude oil buyer, has also been sourcing natural gas and crude oil from the US, with Indian companies investing $4 billion in US shale gas assets. While India is trying to leverage this opportunity to fill its strategic petroleum reserves, there is not enough storage space. The country has an existing storage capacity of only 5.3 million tonnes that can support 9.5 days of net imports. In addition, the NDA government has approved the construction of an additional 6.5 mt reserves that can add another 12 days of crude storage. Also, Indian refiners maintain 65 days of crude storage.

“We expect Brent oil prices to be in the ~ $25-30 range for the second quarter while increasing marginally in the last two quarters of 2020. The gigantic inventory build-ups and lack of storage facilities would also put pressure on prices. Overall, Brent could average $30-35 in 2020, with a strong downward bias," Crisil Research said in a report.

Bloomberg and Asit Ranjan Mishra contributed to the story.

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