In a perfect storm, West Texas Intermediate (WTI) fell to as low as minus $37.63 per barrel on Monday due to a combination of factors such as demand erosion due to the coronavirus pandemic, the US running out of storage space, and a technicality wherein May futures contracts are set to expire today.
After WTI prices turned negative, in a first, it was trading at $1.74 a barrel on Tuesday. While WTI' futures contract prices for June delivery was also down, it was trading at around $20 per barrel.
“April demand is down by 30 million barrels a day due to Covid. With storages and pipelines full, suddenly there was no takers for May futures of WTI, hence this crazy negative number on screen. As such Indian crude basket will hover around mid-twenties, closer to the Brent index," said Debasish Mishra, partner at Deloitte India.
International benchmark Brent also took a hit and was trading at $25.81 per barrel; the price differential between the two types of crude oil is primarily on account of WTI being landlocked, resulting in restricted storage options. In comparison, Brent from the North Sea has access to tanker storage.
This comes in the backdrop of the International Monetary Fund (IMF) stating that the global economy is staring at a crisis not seen since the Great Depression of the 1930s. Oil prices had touched an all-time high of $147 per barrel in July 2008.
The low energy price regime could put a majority of US shale oil producers out of business in the run-up to US presidential elections in November. Saudi Arabia has the lowest cost of production at around $3-5 per barrel, Russia also has a cushion given that its onshore production costs are around $16-18 per barrel. In comparison, a typical US shale well requires oil to be at $68 to post returns.
The oil market is facing a situation called contango, wherein spot prices are lower than futures contracts. According to the US Energy Information Administration, the 76-million-barrel storage capacity at Cushing, Oklahoma, is rapidly filling up.
“April is expected to be the bleakest month for the industry, with demand set to plummet by 29 million barrels a day compared with the same month last year," the International Energy Agency said in a statement.
India, the world’s third largest crude oil buyer and the fourth largest importer of liquefied natural gas, has been sourcing LNG and crude oil from the US, with Indian companies investing $4 billion in US shale gas assets.
Energy prices are depressed despite the largest production cut by the Organization of the Petroleum Exporting Countries-plus (Opec+), including Russia, which have ended their high-stakes game of flooding global markets amid the covid-19 pandemic. With Opec accounting for 80% of India’s crude oil imports, any production cut by the so-called Opec+ arrangement impacts India’s energy security efforts in the short run.
“The coronavirus crisis is manifesting itself through three types of shocks in APAC – country-specific, regional and second-round – and that government relief measures, though swift and extensive, will not be enough to offset the effects on the economy," Moody’s Investors Service said in a report on Tuesday.
Low energy prices bring good tidings for major consumer nations such as India but with the countrywide lockdown there is hardly any demand for petrol, diesel and jet fuel. Demand for cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.
The cost of the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, was $20.56 a barrel on 17 April, according to the Petroleum Planning and Analysis Cell. The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in 2016-17 and 2017-18, registered an average of $54.563 in February. The cost was $33.36 in March.
Plunging global oil demand provides an opportunity for India’s ambitious and costly Indian Strategic Petroleum Reserves (ISPR) programme.