Crude dipping to sub-zero level will not bring down petrol prices in India

Priyank Upadhyay

Oil hit historic lows with WTI crude oil ending at a negative $37.63 a barrel on April 20. A negative price suggests sellers were paying buyers to take deliveries in a bid to avoid incurring of storage cost, as demand crashed globally.

The sharp divergence was seen as WTI needs to be delivered physically at Cushing, Oklahoma (US), whereas for Brent contracts, deliveries can be done offshore at multiple locations.

The storage constraints at Cushing, Okhalama, led to the dumping and unwinding of May contracts with other market participants moving to June contracts.

The reason behind this fall is with the pandemic bringing the economy to a standstill, and there is so much unused oil sloshing around that American energy companies have run out of room to store it.

If there’s no place to put the oil, no one wants a crude contract that is about to come due. Price on the futures contract due a month later settled at $20.43 per barrel. That gap between the two contracts is by far the biggest ever.

U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first.

The US government’s refusal to regulate oil production and impose mandatory cuts also added to the bearishness in prices. The US is still producing vast amounts of crude at 12.3 million bpd, as per Energy Information Agency, down from 13 million bpd in March.

As the global economy is in a complete standstill there is no demand for new oil. Even with the cut in supply from the oil-producing countries, we are still in an oversupplied world. The transportation cost of shipping oil has gone up 3 times since March 2020.

Lower Crude oil prices are beneficial for the Indian economy as it will lower the current account deficit, reduce inflation and would boost GDP in the coming quarters.

However, crude plummeting to sub-zero level will not bring petrol prices down significantly in India because of currency impact, as we import crude oil we settle the bills in the dollar, the rupee-dollar difference will offset gains from lower crude oil prices as with all Asian currency rupee has also weakened towards 76.50.

The cost of the Indian basket of crude, which is the average of Oman, Dubai and Brent crude, was at $20.56. Retail prices of petrol and diesel in India are linked to the price of these fuels in global markets not that of WTI Crude oil per se.

So only when these product prices come off, will we see some impact on pump prices in India. Besides, with our tax component still high, the consumers may not get the desired relief.

(The author is AVP - Commodities, SSJ Finance & Securities)

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