The oil glut

The crash in futures may not benefit India

The shock of “negative oil prices” has reverberated throughout the world, bringing home the nature of the current economic slowdown caused by Covid-19 and the measures to fight it. This week, one particular oil price — the price of West Texas Intermediate (WTI) crude oil, for delivery in May— fell as low as (-) $38 a barrel on April 20, the last day before they were due to expire. In other words, for some producers in the US, it was cheaper to pay people to take away the oil from Cushing, Oklahoma — the traditional and outdated hub for WTI — than it was to find storage or to shut down their wells. Little is known about the technological factors behind the long-term stress on some US shale oil wells, and there is concern that ceasing output from them might cause lasting damage. Thus, the negative futures price, which has swiftly rebounded. June futures for WTI are close to $12 a barrel. Futures further out have also been hammered in the last month’s trading, but suggest the market still believes in a snap back to levels above $30 a barrel for Brent crude, the headline price, by October, and to above $35 a barrel by this time next year. Brent crude is currently trading below $20 a barrel. 
 

This does not reflect conditions in the broader crude oil market, where storage is filling up but not full. Even in the US, 23 per cent of capacity remains unfilled, which would take three months to fill. Some oil is being kept on tankers rather than being offloaded, but even that in many crucial geographies has not reached non-crisis heights seen in 2016-17. India, however, is a special case. The storage capacity in the country is about 85 million barrels, but the nationalised oil-marketing companies reportedly estimate that this capacity is about 95 per cent full. Thus, they can hardly benefit from global crude oil prices going lower. The storage has been filled because of the steep fall in fuel demand, which dropped by almost 20 per cent in March but may fall as much as 50 per cent in April. It reportedly dropped by more than 60 per cent in the first half of the month. Storage capacity is almost full, although refineries within India may be running at 35 to 50 per cent of capacity. Retail prices in India, however, have not been changed at the pumps since March 16. 

The effects on India of this reshaping of the oil market are not quite positive. While lower prices are good, it is not as if India is in any position to benefit greatly from these ultra-low prices since it cannot fill up its storage further. Nor will there be the benefits associated with a general decrease in costs, since the economy is in deep freeze anyway. More to the point, there will be a dual effect on the economy to consider. First, government budget projections depended upon the sale of oil major Bharat Petroleum Corporation — a sale which might be something of a disaster under current circumstances. Revenue from petroleum products will also be affected. Thus, the fiscal impact is worrying. Second, the pressures will grow on the Gulf countries, home to a large Indian diaspora. Some of these workers will now be in distress, and remittances will fall. The government must keep an eye on these two factors.