The fall in crude prices is not a standalone event; it is a manifestation of multiple factors, which include global demand and structural geopolitical challenges.
Crude oil futures slipped to Rs 1,466 per barrel on April 21 as participants increased their short position as seen by the open interest. West Texas Intermediate (WTI) May crude futures on April 20 declined to a historic low of minus $40 at one point as traders paid buyers to take delivery due to lack of storage capacity at Cushing oil hub in Oklahoma and oversupplied market.
“It's a grim situation playing out in the oil markets grabbing eyeballs of the entire investor fraternity and defying logic. The absolute collapse of WTI prices is primarily owing to the expiry of May WTI contracts, alongside the significant demand destruction due to lockdowns in several countries and supply glut in oil markets. Put simply in other words, the sellers are paying the buyers. Oil traders are unwilling to take delivery owing to lack of storage space,” said Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking Ltd.
This is in complete contrast to Brent crude prices trading at about $25/bbl. The reason for this sharp divergence is that WTI needs to be physically delivered at Cushing, whereas for Brent contract, deliveries can be done offshore at multiple locations, Sachdeva said.
“Decline in crude prices is a big positive for the Indian economy as we import the bulk of the commodity. In general, sectors that may benefit from the scenario include FMCG companies, paint companies and OMCs. However, the fall in crude prices is not a standalone event. It is a manifestation of multiple factors, which include global demand and structural geopolitical challenges. So, while the benefits of lower crude prices are clear, there will also be an impact of global demand challenges, which could outweigh the benefits of lower crude prices," said Naveen Kulkarni, Chief Investment Officer, Axis Securities.
Care Ratings has said in a note that the reason for the negative prices is quite simple; there is production taking place, even though demand is 30 percent lower than normal and there is no place to store oil. The land-based storage is full and while sea-based containers are in demand where the cost is higher, everyone knows that the situation will not improve quickly. The futures contract to expire had holders sell off in a big way as no one wants to take delivery due to shortage of storage.
The rating agency further said crude is unlikely to recover given that the shutdown across countries means demand for petrol and diesel is virtually declining and unlikely to recover in the next few months.
In the futures market, crude oil for May delivery touched an intraday high of Rs 1,727 and an intraday low of Rs 1,459 per barrel on MCX. So far in the current series, black gold has touched a low of Rs 1,459 and a high of Rs 3,905.
Crude oil delivery for May declined Rs 425, or 23.98 percent, to Rs 1,347 per barrel at 15:15 hours IST with a business turnover of 15,838 lots.
Crude oil delivery for June declined Rs 325, or 15 percent, to Rs 1,842 per barrel with a business volume of 1,210 lots.
The value of May and June contracts traded so far is Rs 2,525.18 crore and Rs 82.26 crore, respectively.
West Texas Intermediate crude slipped 25.45 percent to $15.23 per barrel, while Brent crude, the international benchmark declined 23.93 percent to $19.45 per barrel.Time to show-off your poker skills and win Rs.25 lakhs with no investment. Register Now!
