{"id":1048,"date":"2020-04-23T16:51:43","date_gmt":"2020-04-23T11:21:43","guid":{"rendered":"https:\/\/blog.tickertape.in\/?p=1048"},"modified":"2020-04-23T20:40:51","modified_gmt":"2020-04-23T15:10:51","slug":"low-crude-oil-prices-reasons-and-effect-on-india","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/","title":{"rendered":"Low crude oil prices: reasons and effect on India"},"content":{"rendered":"\n<p>Folks, today we will discuss the historic plunge in WTI oil prices.<\/p>\n\n\n\n<p>Had you ever imagined a time when oil sellers would pay buyers to get rid of their stock?<\/p>\n\n\n\n<p>Eh, how&#8217;s that even possible?<\/p>\n\n\n\n<p>But, hey it is happening now and we aren&#8217;t kidding!<\/p>\n\n\n\n<p>Remember when OPEC declared a crude oil production cut to boost prices? If you don\u2019t know about it, you may read <a href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/?ref=blog\">here<\/a> for a better understanding of what\u2019s happening and why.<\/p>\n\n\n\n<p>Coming back to the point.  Just over a week before, both OPEC and non-OPEC members agreed to cut oil production to prop up falling prices on account of the dampened demand for crude oil triggered by COVID-19.<\/p>\n\n\n\n<p>Well, turns out, it did not help.<\/p>\n\n\n\n<p>On Mon, the 20<sup>th<\/sup> Apr 2020, something historic happened in the oil market so much so that it startled producers and investors alike and sent global <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-and-nifty\/\">benchmark indices<\/a> diving.<\/p>\n\n\n\n<p>Reason?<\/p>\n\n\n\n<p>The May futures of West Texas Intermediate (WTI), an American benchmark for crude oil, fell 305% and closed at -$37! (we had given you a spoiler just in the beginning).<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#How-can-the-WTI-price-touch-negatives\" title=\"How can the WTI price touch negatives?\">How can the WTI price touch negatives?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#What-does-the-historic-decline-in-crude-oil-prices-mean-to-India\" title=\"What does the historic decline in crude oil prices mean to India?\">What does the historic decline in crude oil prices mean to India?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#Why-are-fuel-prices-not-falling-in-India\" title=\"Why are fuel prices not falling in India?\">Why are fuel prices not falling in India?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#A-weak-rupee-against-a-strong-USD\" title=\"A weak rupee against a strong USD\">A weak rupee against a strong USD<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#Brent-crude-price-is-stable-against-the-WTI-price\" title=\"Brent crude price is stable against the WTI price\">Brent crude price is stable against the WTI price<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/#Oil-prices-consist-of-additional-costs\" title=\"Oil prices consist of additional costs\">Oil prices consist of additional costs<\/a><\/li><\/ul><\/nav><\/div>\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How-can-the-WTI-price-touch-negatives\"><\/span><strong>How can the WTI price touch negatives?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>No one has ever heard of the oil price dipping to negatives. Then, what explains this unprecedented behaviour now? Let us examine the reason for this oil market crash.<\/p>\n\n\n\n<p>1.\tEver since COVID-19 set foot, the demand for crude oil was plummeting. What can you expect when people across the globe are locked down and industries are shut? With no to low demand for oil, the prices plunged significantly.<\/p>\n\n\n\n<p>2. A dampened demand for oil due to coronavirus\u2019 impact created an oversupply of oil in the world. Now, it\u2019s not like oil is air, right? Meaning, it needs storage space. And when millions of barrels of oil are accumulating because of low demand and consumption, oil needs more place to be stored. But the US has so much oil now that Cushing (Oklahoma) is running out of storage space. And tankers are charging a bomb, if at all they are willing to house the barrels. Literally, the entire world is facing storage woes.<\/p>\n\n\n\n<p>3. The WTI futures for May were set to expire on Tue and investors who held the contract were to take physical delivery of oil barrels. They simply can\u2019t hold on to the WTI futures and refuse to take physical possession, right? But with no place to store physical barrels, investors were at their wits end, which forced them to go on a selling-spree. This means investors literally sold their WTI oil futures contracts to avoid storage and price issues. No wonder why WTI oil futures contracts fell below the zero level and touched -$37!<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-does-the-historic-decline-in-crude-oil-prices-mean-to-India\"><\/span><strong>What does the historic decline in <\/strong><strong>crude oil prices<\/strong><strong> mean to India?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Now, you may think that such a plunge in oil prices is good for India, given we are the world\u2019s 3rd largest crude oil and 4th largest liquefied natural gas importer (we import ~80% of our crude oil needs). Note this, every $ rise in the price of oil adds ~Rs 11,482cr to our import bill, results in a balance of payments, and lowers the value of the rupee. Ultimately, fuel-dependent companies transfer such high costs to end consumers.<\/p>\n\n\n\n<p>But what happens when prices fall? With every $ drop in the price of a crude oil barrel reduces our import bill by Rs 10,700cr yearly. Now, if fuel companies transfer high prices to consumers, they should ideally be transferring the benefit of low prices as well, right? But as you see, it is not happening. Here\u2019s why.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why-are-fuel-prices-not-falling-in-India\"><\/span><strong>Why are fuel prices not falling in India?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Yes, on the face of it, a lower price of crude oil prices in international markets would ideally translate to a drop in prices in domestic markets as well. Also, the government is looking to fill its strategic oil reserves to benefit from the low prices. However, the benefit of low prices will not be transferred immediately. Let us see why.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A-weak-rupee-against-a-strong-USD\"><\/span>A <strong>weak rupee against a strong USD<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>First, the rupee has been plunging compared to the USD. Our import bill is in dollars. This means that we still have to make up for the difference between the rupee and the dollar. Naturally, the gain from a lower oil price will be absorbed by a strong dollar value.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Brent-crude-price-is-stable-against-the-WTI-price\"><\/span><strong>Brent crude price<\/strong><strong> is stable against the <\/strong><strong>WTI price<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>India majorly imports Brent crude oil and not WTI. Further, Brent crude prices are not as volatile as the WTI. So, a fall in the WTI may not help us a lot.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Oil-prices-consist-of-additional-costs\"><\/span><strong>Oil prices<\/strong><strong> consist of additional costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>You may be familiar with the fact that in India, the government controls the oil prices. Also, the centre gives subsidies to state-run oil companies, which adds to its total cost. This means that the government does as required, meaning it may reduce prices, increase them or keep them unchanged according to what the economic situation demands.<\/p>\n\n\n\n<p>Now, you saw that India has one massive import bill to pay every year. Plus, with the economy falling out due to COVID-19, the government\u2019s revenues are impacted significantly. Therefore, the low oil prices are likely to be policymakers\u2019 instrument to meet the fiscal deficit. This means that any benefit passed on to us may not be significant and immediate.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In a historic event, crude oil prices fell to a shocking -$37 on 20th Apr 2020. Read the reasons and its impact on India here<\/p>\n","protected":false},"author":27,"featured_media":1055,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[10,1744],"tags":[],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/04\/2136-scaled.jpg?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1048"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=1048"}],"version-history":[{"count":9,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1048\/revisions"}],"predecessor-version":[{"id":1061,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1048\/revisions\/1061"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/1055"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=1048"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=1048"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=1048"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}