After epic crash to $0, WTI Crude rebounds to $1.10 a barrel

by Nilesh Wadhwa & Shahkar Abidi 21 Apr 2020

The ongoing Covid-19 pandemic has caused unprecedented impact and continues to wreak havoc amongst countries, industries, and citizens alike. With the global lockdown in place, oil consumption and the demand has started bottoming out.

In an historic incident, oil prices in US went down to zero, after US oil future benchmark West Texas Intermediate for May delivery was trading at $1.10 (Rs 81.11) a barrel after closing at -$37.63 (- Rs 2,785) in New York. The crude oil futures are said to be a standardised, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil (eg. 1,000 barrels) at a predetermined price on a future delivery date.

WTI is the benchmark for American Crude Oil. Brent Crude continues to trade at $25/ bbl. Also,not all contracts of WTI are trading negative. The negative price is only for near month contract which expires later today. The near-term contract is trading in negative zone because Cushing, a location in US where Crude is stored, is at the moment full of oil and it's running out of space to store the barrels. As a result of the lockdown globally due to the Covid-19, it has created unprecedented demand shocks leading to an over-supply.

That apart, the other reasons for the drop in prices is said to be the oil price war between OPEC and Russia, strategic reserves by nations being at high-level and uncertainty over the return to normalcy for countries globally, among others.

Even in India there is a lowering of demand. Indian Crude Consumption has dropped by over 30% SAAR as suggested by data released by PPAC (Petroleum Planning & Analysis Cell) for March 20.

Will the development impact retail pricing in India?
So, will the development bring down the cost of fuel at retail pumps for the motorists? Experts don’t think so. Describing Monday's West Texas Intermediate (WTI) fall to be just a “local market crash”, the Director (Refinery) of an oil marketing company (OMC) said the crash happened because of constricted storage spaces in the oil market apart from near non-existent demand.  Also, since Monday-Tuesday being the last days of expiry of the current trading term, the sellers are desperate to dispose of the crude before the deadline. The pricing for the month of June and beyond continue to hover at a relatively reasonable price of over $20.

“So, there is no impact of that (on India), as it is happening in the US and if you see Brent or Dubai and others (crudes), those are still trading at $20-23 range” the executive said. According to industry estimates, WTI’s percentage in the Indian crude basket is paltry 1-2 percent. On the other hand, Dubai and Oman crude constitute significantly large parts with about 70-75 percent while Brent makes up for the rest of it. What makes WTI less attractive for Indian refiners is the fact that its purchase may entail higher freight charges because of the distance and subsequently higher retail price. 

The global petroleum industry today boasts of over 160 different types of crudes, varying differently in characteristic and quality. Amongst those, Brent, WTI, OPEC basket price, are some of the highly traded ones across the energy world.

Negating that the fall in US crude will make automotive fuel cheaper in India, K Ravichandran, Senior VP & Group Head at rating agency ICRA, said that the retail pricing is dependent on several factors. These include global prices of petrol/diesel, index of trading parities for imports and exports, dealer commission, exchange rates of currency, government taxes amongst others. Moreover, the retail fuel prices have remained unchanged in India since around a month as OMCs are trying to make up for inventory losses and ongoing lockdown.  A Bloomberg report had earlier this month suggested that India’s oil demand  slumped by about 70 percent since the lockdown was declared on March 25.

According to Ravichandran, if the lockdown does not get lifted in the US shortly, then the WTI prices will remain at this level for some time. “However, gradually it may get transferred to other crudes as well,  otherwise arbitrage will play out in the market.” Arbitrage is very common in the energy industry, wherein the different crudes are sold and purchased to take advantage of the price discrepancies.

India, which is the third largest energy consumer in the world, is looking to fill up its strategic petroleum reserves  amidst the falling oil prices. The country currently has reserves at three locations - Visakhapatnam, Mangalore and Padur - with reports suggesting it to be over half-full. On the other hand, some of India’s counterparts are placed in a better position to tackle the situation that may arise in case of emergencies. An analysis by S&P Global Platts, suggests that China has a total reservoir capacity of 550 million barrels, while Japan and South Korea have a safety net of 528 million barrels and 214 million barrels respectively. In comparison, India with 39 million barrels has just 9 days of fuel in case of an emergency. Japan on the other end of the spectrum  will be able to sustain for 198 days during similar situations.

Leading crudes of the world
West Texas Intermediate (WTI)

WTI is a light crude with API gravity of 39.6 degrees. Also, it contains about 0.24 percent of sulphur, marking it as 'sweet' crude. This set of characteristics, combined with its production location (US), makes it an ideal crude oil to be refined in the United States.

Brent is actually a combination of crude oil from 15 different oil fields in the Brent and North Sea areas. It is a reasonably 'light' and sweet crude oil with API gravity of 38.3 degrees and about 0.37 percent of sulphur. Brent blend is ideal for making Motor Spirit (Petrol) and middle distillates.

It collects pricing data on a 'basket' of seven crude oils: Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arab Light, Dubai's Fateh, Venezuela's Tia Juana Light and Mexico's Isthmus. OPEC uses the price of this basket to monitor world oil market conditions and its own prices.



Lead image: Hajar Group
Image used only for representational purpose