Empire Diaries Desk
April 23, 2020, New Delhi: Did you ever imagine that someday a litre of crude oil will become cheaper than a bottle of mineral water? That bizarre scenario has come true, thanks to a puzzling collapse in international oil prices this week.
The price of American crude oil, known as West Texas Intermediate or simply #WTI, plunged to minus $37.63 per barrel (yes, minus, you read it right!). Suddenly, crude oil, that used to sell for $120 per barrel about 10 years back, now has a negative price tag. It means, as a buyer, instead of paying, you’ll get paid $37.63 per barrel if you buy US crude oil. Too good to be true!
The price basically slid by $55 per barrel, making it a staggering 300% fall in the US #OilPrice. And the crash is not just about America. At the same time, global oil prices have hit rock bottom too. This is unprecedented and it has taken the spotlight away from the #coronavirus #pandemic.
WAS IT COMING?
This #OilPriceCrash may come as a shock to many people. But in industry circles, it was somewhat predicted by many insiders.
In their oil market report for April, the International Energy Agency predicted a sharp fall in demand for oil and prices.
The #pandemic has sparked mass #lockdowns in over 200 countries. Cars are off the roads. Passenger planes are mostly off the skies. Only governments and a handful of airlines on urgent duty are still buying some limited quantities of oil for essential needs.
The writing is on the wall. Suddenly, there are no buyers in the global marketplace of oil. Expectedly, this massive fall in demand has triggered the collapse in prices.
Now that most of the produced oil is not selling, new production has seen a spectacular drop in the last five weeks.
WILL PRICES FALL FURTHER?
The general slide in American, as well as global oil prices, is likely to continue for at least two more months, experts feel. Their fears are obviously based on the negative outcome of more lockdowns to come. It’s not known if prices will hit another record low. But they will certainly not improve drastically in the months to come.
#JohnKilduff, a partner at New York-based investment firm #AgainCapital, believes the scenario will remain bleak for oil seller at least till June, of not more. “The June contract is not going to fare any better. There’s no way the inventories clear,” he says.
Financial markets expert Peter Earle points to an unusual crisis within the oil price collapse. Like many others, he feels that with vanishing demand for oil, there’s an excess quantity of oil out there. And it’s owners and producers are struggling to find enough storage for it. “Storage for this unsold oil is virtually non-existent. The United States and the rest of the world are now possibly for the first time in history, oversupplied with oil,” says Earle.
Due to an unmanageable oversupply of oil, top #OilExporters such as Russia, Saudi Arabia, Iraq, Iran and Brazil have all gone into a state of shock. In an important deal struck recently, Moscow and Riyadh promised to cut oil production by 10%. Yet, the deal didn’t any impact on what was to come.
WILL INDIA GAIN OR LOSE?
The question every Indian wants to know is: will India gain from this oil price crash? What’s in it for the Indian government? What’s in it for the average Indian?
Will Indian consumers benefit from this international oil price crash. Will they be able to buy petrol or diesel at their neighbourhood pumps for much cheaper rates than they have been paying?
The answer to that is a disappointing ‘no’. India is not a buyer of American crude oil, which has fallen to a negative price level. Most of India’s oil needs come from Iraq, followed by Saudi Arabia, Nigeria, UAE and Venezuela.
Of course, the prices of oil that these countries sell have also dropped in a big way. Which means the Indian government is in a position to buy oil that is at its historically lowest prices. But it is quite unlikely that the Indian government will go on to lower the price of petrol and diesel at the level of the Indian consumer.
At most, the average Indian might get the benefit of only a marginal drop in the price of petrol and diesel. It won’t be on par with the global oil price crash.
Recent history gives us an example. In 2014, when global oil prices crashed due to sudden oversupply, Brent crude, the international benchmark for oil prices, collapsed from over $110 per barrel to less than $30 per barrel. Since then, oil prices never recovered to the $100 per barrel stage.
Yet, at that time, the average Indian didn’t see the price of petrol and diesel come down at their neighbourhood pumps. There was simply no reflection of the international oil price crash on consumer-level prices in India.
WHO’S THE REAL WINNER?
In 2013, China overtook the US as the world’s biggest oil importer. One year later, the global oil price underwent a sudden collapse from which it never recovered. With a further drop in oil prices due to the coronavirus pandemic, it turns out that China is financially the biggest winner in this situation.
Experts think along the same lines, like #BaiJun, a member of the economic committee of China Petroleum Society, which is an association of Chinese energy researchers. Bai believes that China is easily the biggest beneficiary here. “China benefits a lot from the price war as it is the world’s biggest crude importer,” the expert says.
Behind every major development in the world of energy prices, there are always winners and losers. As crude oil prices have hit a historic low in recent days, thanks largely due to the coronavirus pandemic, the top oil-exporting countries are clearly the big losers. Such as the US and the West Asian kingdoms.
And clearly among the biggest winners are China, US, India, Japan and a few others who are major importers of oil.
THE STRANGE CASE OF AMERICA
Interestingly, America finds itself on both sides of the balance sheet. The country has traditionally been a major oil importer. But in recent years, the US also opened up as an influential oil seller in the global marketplace. In the current scenario, the US loses out big time as potentially one of the world’s top oil exporters. But it also gains on the other hand as the second-biggest oil importer after China. It’s the only country in such a position.