Article:
The recent events in the global oil trade have raised eyebrows worldwide. The prices of West Texas Intermediate (WTI), a highly regarded form of crude oil, fell to an incredible minus $40.32 per barrel during trading in New York, USA. This signifies that the seller of the commodity, instead of gaining from the transaction, ended up paying the buyer $40 for each barrel purchased. This marked a historic low, taking crude oil prices below the zero mark for the first time since World War II.
Oil Pricing Mechanism
Normally, the Organization of the Petroleum Exporting Countries (OPEC), primarily influenced by Saudi Arabia – the world’s largest exporter of crude oil, regulates oil prices within a favorable spectrum by managing production levels. A decrease in production drives up prices, while an increase reduces them. However, cutting production or shutting down oil wells is a complicated, and expensive procedure. Also, any country reducing its output runs the risk of losing market share if others do not follow suit. Recently, Russia and OPEC, functioning collectively as OPEC+, have been regulating global oil prices and supplies.
Reasons behind the Price Collapse
Crude oil prices had been gradually falling before global lockdowns due to increased supply and reduced demand. However, disagreements over production cuts between Saudi Arabia and Russia, crucial to maintaining stable prices, led to a severe undercutting war among oil-exporting nations. When coupled with the global spread of COVID-19, which further reduced demand, this became a catastrophic formula. Even after consensus was reached to cut daily production by 10 million barrels, demand continued to plummet, leading to a severe storage crunch.
The WTI Crisis
Producers began selling oil at low prices as shutting production would have been costlier to restart compared to the marginal loss on May sales. However, consumers faced a storage issue. There was no space to store the oil even if they decided to buy and take delivery. Thus, both producers and contract holders ended up paying $40 a barrel to get rid of the oil rather than halting production or storing it.
The Future of Oil Prices
While US markets saw a severe dip in WTI prices for May, global prices didn’t fall as drastically. Prices for June and beyond are estimated between $20 and $35 a barrel. Budgets of exploration and production companies are expected to shrink because of low shale oil prices. Normally, this would prompt oil-exporting countries to cut back production and rectify the excess supply. However, given the recent events, a repeat performance cannot be entirely ruled out.
Impact on India
Indian crude oil basket does not include WTI, focusing instead on Brent and oil from the Gulf countries. Therefore, there is no direct impact on India. However, the falling prices of Indian oil are indirectly influenced by the weakness in WTI since oil is globally traded. Lower prices can benefit India in two ways: boosting individual consumption if the government passes on lower prices to consumers, or inflating government revenues if taxes on oil increase.
Brent versus WTI
Brent crude oil originates from oil fields in the North Sea. In contrast, West Texas Intermediate (WTI) is sourced from US oil fields, primarily in Texas, Louisiana, and North Dakota. Although both are considered relatively light, WTI, with a lower sulphur content, is “sweeter” and lighter. Brent crude price is the international benchmark used by OPEC, while WTI is a benchmark for US oil prices. Shipping costs for Brent crude are typically lower, while shipping WTI is priced higher due to its production in landlocked areas with limited storage facilities.
Last Modified: February 7, 2024