Most of the Indian’s woke up on Tuesday morning to discover the crude oil prices have fallen below $0 (-$37.63), first time ever in history. The panic in the oil market on Monday was exacerbated by May futures.
Those rejoicing the drop in Crude oil prices and mocking Indian government for not lowering despite the drop, it’s time to educate ourselves on the methodologies followed.
The Crude Oil decline:
The sharp decline is actually on US Western Texas Intermediate (WTI) Crude Oil on the May Futures price of WTI Crude Oil in a bid to avoid incurring of storage cost. This is a simple demand-supply imbalance & glut.
What is the US WTI Crude Oil:
WTI Crude oil is extracted from US oil fields in Texas, Louisiana, and North Dakota and has a lower Sulphur content (0.24%) thus making it lighter. The WTI is traded on the New York Mercantile Exchange (NYMEX) – the commodity futures exchange.
What is Brent Crude Oil:
Brent crude is extracted from the North Sea & has a higher Sulphur (0.37%) content than WTI thus a higher API. It’s price is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC). Brent Crude is traded on the Intercontinental Exchange (ICE) in London.
Impact of WTI Crude Oil on India & Globally:
India buys the crude oil from India Crude Basket (current rate ~ $20) which comprises of 80% oil from OPEC & 20% from Brent. Hence Brent is the benchmark for oil prices in India.
Including India, 75% oil demand is fulfilled by Brent crude & not WTI crude.
Why the divergence between WTI & Brent Crude Oil?
Cost of shipping for Brent crude is lower as it is produced near the sea and it can be put on ships immediately. Shipping of WTI is priced higher since it is produced in landlocked areas in USA where the storage facilities are limited. The cost of Brent crude, the international benchmark, was higher since more storage space is available across multiple locations, making deliveries easier. Although, Brent prices slid 9 percent on April 20, settling at $25.57 a barrel.
Please note that while US WTI crude prices crashed, ICE’s Brent crude are still trading around $25 a barrel level.
For WTI, Crude Oil May contract has become rather illiquid & the United States Oil (USO) funds have already shifted majority assets to June futures. It will be probably still be at $20 then. The oil prices going ahead will depend on how long the lock-down stays and whether there is extension. The efforts to ramp up the global economy once the lock-down is lifted may take a toll, as the lack of employees as well as demand may come down hard on industrial activity.