New Delhi, Apr 21: The historic rout in oil markets that sent US crude prices plummeting to as much as minus USD 40 a barrel is unlikely to translate into any big reduction in petrol and diesel prices in India as domestic pricing is based on different benchmark, and refineries are already filled up to brim and cannot buy US crude just yet.
With storage capacity already overflowing amid coronavirus-induced demand collapse, traders rushed to to get rid of unwanted stocks triggering the collapse of US West Texas Intermediate (WTI) crude for May delivery.
Indian Oil Corp (IOC) Chairman Sanjiv Singh said the collapse was triggered by traders unable to take deliveries of crude they had previously booked because of a demand collapse. And so they paid the seller to keep oil in their storage.
"If you look at June futures, it is trading in positive territory... around USD 20 per barrel," he said.
Low oil prices may seem good in short-term but in the long run it will hurt the oil economy as producers will have no surplus to invest in exploration and production which will lead to a drop in production, he said.
He did not comment on retail fuel prices that have been static since March 16.
Oil companies have not changed rates despite a fall in international prices as they first adjusted them against the increase that was warranted from a Rs 3 per litre hike in excise duty and close to Re 1 per litre additional cost of switching over to cleaner BS-VI grade fuel from April 1.
Petrol in Delhi is priced at Rs 69.59 a litre and diesel comes for Rs 62.29 per litre.
"The negative price has no direct impact on India or Indian oil prices, as this has taken place due to crude oil produced and traded within the US. India's prices are driven partly by another benchmark, the Brent, which is still trading at USD 25/barrel. Therefore, the retail price of fuels in India are unlikely to fall," said Amit Bhandari, Fellow, Energy and Environment Studies, Gateway House.
Also, Indian refineries are already overflowing as fuel demand has evaporated due to the unprecedented nationwide lockdown imposed to curb spread of COVID-19. So, they can't rush to buy US crude.
The refineries have already cut operating rate to half because the fuel they produce has not been sold yet.
India imports 4 million barrels/day (1.4 billion barrels/year) of oil. The country has been benefitting from the falling prices of oil for the last five years, when oil dropped from a peak of USD 110/barrel to USD 50-60/barrel last year, enabling India to invest in public service programmes.
"However, the additional USD 30 fall of this week is good for India - but there is also a downside. If oil prices are too low, the economies of oil-rich gulf countries will be hurt, threatening the job prospects of the 8 million Indians working in the Gulf countries. India is the largest recipient of foreign remittances due to these workers – very low oil prices will hurt this cash stream," Bhandari said.
He said the negative price of oil shows how much oil oversupply exists in international markets today. "Global oil consumption has fallen due to the COVID-19 pandemic that traders are willing to pay customers to get rid of the barrels they can't store. The world does not have enough storage capacity, and dumping the oil is an environmental crime."
The first half of April saw Brent crude oil prices plummet 63.6 per cent to USD 26.9 per barrel. Prices of Western Texas Intermediate (WTI), the American oil, had also fallen similarly by 63.1 per cent.
But on April 20, WTI prices turned rapidly negative because traders on the Nymex exchange rushed to offload their May futures positions a day before expiry of contracts (on April 21).
Such WTI futures are traded on the Nymex exchange with contracts settled in physical crude oil. Problem is, those who had gone long are unable to find storage facilities for the oil and had to liquidate their contracts before expiry. This caused the plunge in WTI prices.
Contrast to this, June WTI Nymex futures prices is hovering around USD 21, while Brent for June delivery is at USD 25.
Miren Lodha, Director, CRISIL Research said the demand for crude oil was declining already because of economic slowdown when the COVID-19 pandemic-driven lockdowns crushed it further.
Consequently, oil demand is expected to contract by 8-10 million barrels per day (mbpd) in 2020 assuming demand recovery begins from the third quarter of the year, he said, adding if recovery doesn't happen by then, further demand destruction could occur.
On the supply side, producers reining in output following a strategic deal between OPEC members, Russia and the US.
Under this agreement, OPEC+ would reduce oil production by 9.7 mbpd for May and June, but gradually ease the curb to 7.7 mbpd between July and December 2020, and to 5.8 mbpd till April 2022 to stabilise prices.
"This is expected to reduce some surplus in the market by the end of 2020," Lodha said.
Crude oil demand is expected to decline by over 20 mbpd in April alone. Typically, monthly global demand is about 100 mbpd. Given this scenario, supply curbs would have limited influence.
Consequently, Brent oil prices is expected to be in the USD 25-30 range for the second quarter while increasing marginally in the last 2 quarters of 2020.
"The gigantic inventory build-ups and lack of storage facilities would also put pressure on prices," he said, adding overall Brent could average USD 30-35 in 2020, with a strong downward bias.
Comments
According to IMD alert appeared in some newspapers on 31 May 2020 , a cyclonic storm is brewing in the Arabian Sea , which is likely to reach coastal districts of Gujarat and Maharashtra by 3 June. It is expected that the these States would take more care and appropriate strategy well in time to combat the likely danger to the coastal districts from cyclonic storm designated as ‘Nisarga’. In this context , it may be apt to refer readers to this Vedic astrology writer’s predictive alerts in article - “ Predictions for coming year 2020 by kushal kumar” - published last year 2019 on 10 October at theindiapost.com/articles/predictions-for-coming-year-2020-by-kushal-kumar/. The related text of the predictive alert reads as follows in the said article :-
“ The next three months from April to June 2020 , appears to be a period of time testing ‘patience’ and ‘ perseverance’ , introducing several parts of the country to worrisome concerns. Coastal States of India , particularly those in the southern part , may be called upon to take more care and appropriate strategy against likely cyclones , storms , floods , coming of danger via sea , landslide and damage to crops during April-June in 2020. Such dates of month of May as 6 , 7 , 13 to 16 , 25 and 26 may be watched with care. Similarly , the dates 3 , 4 , 11 to 13 , 21 , 22 and 26 in June 2020 may be watched with care. Coastal States /UTs such as Gujarat , some parts of Maharashtra ……………………………………look to be vulnerable. It may be apt for them to take necessary precautions during May-June , 2020”.
The aforesaid details suggest that the predictive alert of this writer published last year 2019 on 10 October , is coinciding with the alert of IMD appeared near about 31 May , 2020.
Kushal kumar ,
202- GH28 , Mansarovar Apartments ,
Sector 20 , Panchkula -134116 , Haryana.
1 June , 2020.
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