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Oil crash good opportunity for India to buy crude in bulk and reduce import bill: WEF’s energy head Roberto Bocca

“The fundamental issue (behind the oil price crash) is that there is oversupply and a lower demand than what the supply is trying to face.”

April 22, 2020 / 10:19 AM IST

After a historic crash that saw crude oil prices fall below $0 a barrel, Roberto Bocca, Head – Energy, World Economic Forum, tells Network18 's Kartik Malhotra that this could be an opportunity for consumer nations like India to bulk buy crude and reduce import bills. Bocca, though, is hopeful that there could be some learning and course correction over the coming month for this crash to not repeat when the June contracts come to fruition.

Here is the exclusive interview.

Q: Roberto Bocca, It’s a pleasure having you join us all the way from Geneva today. Well, it’s a strange day. We have seen a historic crash in crude oil prices and of course you understand and appreciate better than anybody else that the world economy depends largely on crude oil. While there was a bit of a recovery later in the day, do you think the worst is behind us or is the worst still to come?

A: Well, I think when it comes to the word economy it is a big question, and oil is a separate issue. Although they are related. So I do think that there would be improvements to come but in the short run it is difficult to say. There is a lot of volatility, some of it is also due to some disconnect between the physical market and the financial market. As we have seen yesterday, in part was also due to contracts that were coming to aspiration and so there were some financial elements versus physical elements playing in yesterday's crash.

Q: But, do you anticipate a similar problem or a similar crash to happen when the June contracts also come into play in May?

Close

A: Well I guess, this will be a good lesson. So there is a month to put things in place. But certainly, the fundamental issue is that there is oversupply and a lower demand than what the supply is trying to face. So with all the storage full, that’s the challenge that is going to be out there. I suspect, with all that is going on, maybe more people are trying to speculate and predict the future. So it is bringing also more immaterial play in the market and so, that may not help.

Q: Roberto, help us understand — storage capacity or demand is unlikely to gather any momentum in the foreseeable future. So how do you think the situation will be any different a month from now, two months from now, three months from now?

A: I think we have to look at this from the perspective of not just what the oil price is going to be but the impact that this has on the economy. And so of course there is bad news but there is also good news. So, the bad news is sure for the countries that rely on oil, and, by the way these are not only the producer countries but they are also the consumer countries, that of course leverage taxes and dividends from shares and so on.

But, there is also a positive side of the story for the consumer country like yours, like India where the impact is positive, right. Somewhere the impact is that, one dollar in the oil price decrease is equivalent to 1.6 billion dollar reduction in the import bill. So when you talk about tons and tons of dollar reduction, this is a huge impact on your current account balance so the reduction in cost can be deployed in different ways. So, there are bad stories but are also good stories

Q: No, I definitely buy your point Roberto, that for a consumer nation like India and many other emerging economies, it is definitely great news that the crude prices are falling. But, it would be great news if the situation was normal and there was consumption in India. Right now India itself might not want to import as much oil as it used to perhaps.

A: Yes that is right, that’s because your point of storage, may be it is a good opportunity to store some oil for the rainy days coming after. Some of the predictions of the economies, and predictions are predictions, but I am talking about Q2 is going to be the worst and Q3 would be still bad but improving and Q4 might be when we start seeing signs of recovery. So, for this quarter to your point it is going to be really tough.

I think this quarter is going to be tough but I also think that the economies and the people are adapting. This is a shock, is something unexpected and then little by little there is adaptation. Human beings are used to adapting and innovations. So this is challenging the status quo, it’s not business as usual, it’s not the usual economic model but that’s an opportunity to adapt as well.

Q: So do you think the producers and the consumers of oil are now likely to sit together and plan out a mitigation strategy. Do you think upstream and downstream now need to converge at some point and understand how best to optimise this excessive supply, which is leading to such shocks?

A: I think this is a great question. If you look at what happened a few weeks ago with the conversation of OPEC and the next day of G20, there was almost a global alignment between OPEC, OPEC Plus and the G20 on what should happen. And of course was insufficient because the scale of the impact of COVID-19 is much bigger.

But, that was the first element of a possible agreement. I think energy is certainly an enabler of economic growth. We all think that it is. And so have a sort of agreement or understanding of how the market plays but also how regulating it in a certain way is an opportunity. So I do think there is an opportunity for this to happen again, maybe go beyond oil. Because energy stability to some extent gives the opportunity for the energy transition to happen in a smooth way.

Q: How do long-term contracts play out at a time like this? How do long-term contracts play out for countries which are in a long-term agreement to procure oil or gas?

A: Well, I guess it’s on a negotiation basis. So this is a great period but it is an uncharted period for contracts. Long-term contracts have always been made. There are countries that in the past preferred the stability to say. I know what the prices are going to be, whichever way it goes. At least I have stability. There will be countries that prefer more you know to play on the day. It’s like if this contract is only a mortgage or a variable. So, it depends on what people prefer.
Moneycontrol Contributor
Tags: #crude #oil
first published: Apr 22, 2020 10:19 am

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