As the date of delivery of West Texas Intermediate (WTI) crude contracts for June approaches, paper traders, producers and the world wait with bated breath to see whether there will be a repeat of what happened on April 20. WTI is the U.S. oil benchmark.

On that momentous day, prices of future contracts of crude expiring on April 21 turned negative (minus $37.63 a barrel), the first time in its long, chequered history. Spot prices, too, fell below zero and panicky oil producers and traders dumped a large volume of futures. Even prices of Brent crude—the benchmark for North Sea crude—also crashed, but they stayed in positive territory.

However, crude prices were back in the black the very next day because traders had started focusing on the June contract, after the bloodbath of the May contract. The negative price shock of April 20 was primarily driven by reports that the storage capacity for crude at Cushing, Oklahoma—the sole delivery point for WTI oil—was running perilously low, and if traders were to take physical delivery of the stocks they would have no place to store it.

So the traders had only two choices—either roll over the contract for a future date or sell it to someone else. Since they could not roll over the contract, desperate investors and traders were willing to pay others to take the barrel instead and hence the mayhem in the market.

The larger question, however, is whether oil prices can sink back into negative territory again at the time of the expiry of June futures. “That will depend on whether there is a pick-up in demand or a fall in supply,” says Vikram Singh Mehta, chairman, Brookings India and senior fellow at Brookings Institution. “But right now there are no clear signals of a demand pick-up.”

But Mehta is clear that while crude oil prices for June may be currently in positive territory, the market can see a volatile downturn in prices if on the day, before the expiry of the contract, traders feel that there is not enough storage capacity.

Incidentally, the U.S. crude oil storage capacity at Cushing is about 91 million barrels, according to the latest report as on November 2019 of the US Energy Information Administration; nearly 80% is already booked. But more importantly, as Mehta points out, the underlying reality is very straightforward. “The demand for oil has crashed and the supply has not fallen in equal measure, so there is more oil coming in the market and there is no storage facility.”

Demand, for instance, has fallen by nearly 30 million barrels a day, the total crude production of the Organisation of the Petroleum Exporting Countries (OPEC), nearly one-third of the total global demand of nearly 102 million barrels a day. “So while demand may remain suppressed in the short-run, if you go beyond the second or third quarter of FY21, then you might be looking at different scenarios depending on the pace of economic recovery defined as various alphabets like V, U or W, etc,’’ says Mehta.

Such a demand-supply mismatch is likely to impact Brent crude prices too—oil that is traded globally—despite the differential in prices because of the quality of oil. Brent crude from the North Sea is of much higher quality and hence demands higher price. So what will the impact of low-oil price mean for India and the world? Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64 a barrel) over the next 12 months or so. “More likely, they will be volatile downwards with $50 as the ceiling and with no floor,” says Mehta.

Moreover, the “low-for-longer” price outlook raises two issues for the country’s policymakers, argues Mehta. One, what are the supply risks? And two what can they do to maximally leverage the advantages of low price? According to him, many of the poorer oil producing countries like Iran, Iraq, Nigeria and Venezuela, which have no financial cushion to tide over the crisis, will confront deepening political and social crises. “India should build into its economic plans the possibility that its traditional oil supply routes get disrupted. And that its diaspora, whose remittances are of significance, could face disproportionate hardships as these economies retrench,” says Mehta.

Because India imports nearly 85% of its crude oil requirements, low oil prices are beneficial from the country’s macroeconomic point of view—better balance of payment situation and reduced current account deficit, etc. However, oil exploration and production companies will be under pressure. “Indian companies will no longer have the financial surplus to invest in exploration and we will not be able to harness our indigenous hydrocarbon reservoirs,” he adds.

But, if prices of crude oil stay at $19 to $21 a barrel, the world will see a bloodbath with many smaller players filing for bankruptcy because the marginal cost of producing oil will be higher than the designated price. But global oil majors like Shell, Exxon, Chevron, etc. will continue to keep producing from various basins not just because continuous production will help them recover their costs and also because shutting off operations now will mean taking months to restart the production process again.

For India, such low crude prices provide a great opportunity for trading experts in public sector oil companies to buy WTI futures for June, take delivery, ship it to India and store it someplace, provided it is allowed by the government.

It is also the right time for the government to shift from oil to cleaner fossil fuels like gas, initially, and then to renewable energy to make it the fuel of the future. He recommends gas initially because he believes that there are enough suppliers for gas in the world like the U.S., Qatar, etc. “Currently, however, the demand for gas has collapsed because its major users like fertilisers and chemical plants and transportation services are not working,” says Mehta.

Mehta, however, is categorical that unlike in the earlier decades there is little chance of the demand shock turning into a supply shock because of little or no investment in the exploration and production by the global oil players, when growth finally returns. There are one or two new elements in this equation that could disrupt the linear argument of supply shocks turning into demand shock. First, the drive towards decarbonisation in the global economy and the growing public sentiment against fossil fuels that will force oil majors to shift to generation of cleaner fuels.

Secondly, Covid-19, says Mehta, will only accelerate the move towards renewable energy because countries have realised that issues of climate change and pandemics cannot be only seen through a nationalistic lens. “We have to find a way to collaborate across national boundaries and find international responses,” says Mehta. Moreover, low oil prices are unlikely to ensure a collapse of the renewable energy sector “because it has become an integral part of the behavioural and economic model of the post-Covid world.”

“My fundamental belief is that in post-Covid world, public pressure will not allow the government and companies to return to a high carbon growth trajectory,” says Mehta.

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