US crude oil price bounce back from below zero
Tuesday morning was shocking as US crude oil i.e. WTI Crude price had fallen below zero. It isn’t the first time in 2020 for crude prices to plummet by a high percentage. However, post-noon, the WTI crude price showed a mere recovery by trading above zero to USD 0.10 per barrel.
In the overnight trade, May futures for US crude oil WTI fell to negative USD 37.63 per barrel ahead of the expiry on Tuesday of May WTI futures contracts. Mayhem in the oil market that basically led to a negative crude price suggested that the sellers were paying buyers to take deliveries so as to avoid any additional storage cost incurred to store the excessive unused oil. This situation was seen as majority of the world is under lockdown and experiencing extremely reduced trading activities. As a relief, OPEC allies had announced on cutting down the oil supply but currently, there is still excess oil with a lack of storage space.
A contrasting situation can be seen as US WTI crude price crashed but Brent crude continued to trade at USD 25.36 per barrel. The difference is seen as in reality, WTI has to be delivered physically at Cushing, Oklahoma (US) whereas for Brent, deliveries can be done offshore at multiple locations. Hence, storage constraints at Cushing (Oklahoma) led to dumping and unwinding of May futures. As for June contract, the prices stayed around USD 20.43 per barrel.
This crash in prices has highlighted the stark difference by which US oil markets were oversupplied on one hand and by the slowdown in industrial and economic activity caused by COVID-19, on the other hand. A common thought that occurs is that a drop in crude prices may lead to reduced petrol prices. This is actually incorrect as the cost of Indian basket of crude is made up of the average of Oman and Dubai while, Brent crude and was last at USD 20.56 per barrel on April 17, 2020. The retail petrol and diesel prices in India are linked to the price of these fuels in global markets and not that of crude oil directly.
On Tuesday, with oil prices being under pressure, a major impact was felt by oil and gas stocks as well as aviation stocks. ONGC was seen trading down by 5.40 per cent at Rs 70.05, GAIL fell by 1.66 per cent and was trading at Rs 86, Reliance Industries was down by 3.97 per cent at Rs 1,195, Petronet LNG fell by 2.82 per cent and was at Rs 212.15, Indian Oil Corporation fell by 4.05 per cent and was at Rs 84.05. Amongst aviation stocks, IndiGo dipped by 1.63 per cent and SpiceJet fell by 3.98 per and was at Rs 45.80.