When oil was cheaper than Netflix.

Oil. The most widely discussed topic in the market today. What one could have never thought of the most unimaginable event occurred during this recession. With the oil prices trading close to zero and finally the trading ending at a price of negative 40.26$ a barrel. So why did this happen? What exactly is WTI and BRENT? Why did BRENT not fall below zero? And can this happen again? The answers for these are in the blog read on to and let the banter begin.

  • How are oil prices determined- The market forces of demand and supply which are responsible for determining the price of any commodity plays a major role for this matter. But also market sentiments of the buyers and sellers play a key role. Now oil trading is different in terms that we trade oil futures (instead of regular oil stocks).The oil futures makes the buyers and sellers obligated to buy and sell oil at a predetermined price and date.

  • So why did it go negative ?- The important thing to understand here is that oil is traded using futures. The oil futures were expiring in April, and thus the sellers were obligated to sell them on that date, but the buyers were not ready to but the major reason being the way WTI is traded. WTI is traded on the grounds of physical delivery, to simplify if a person owns X no. of barrels of WTI crude then he will have to store them at Cushing,Oklahoma like storing actual physical barrels. Now since "West Texas intermediate" ran out of storage spaces thus to avoid bearing storage space costs which would have exceeded the value of oil and to avoid the cash settlement loss they actually paid the buyers 40$ to buy the barrels (or sold at a discount), and hence the negative prices whereas a Netflix subscription costed 9$. As the WTI crude's June futures are being traded right now hence we are witnessing positive prices, but experts do suggest another downfall.

  • Is another negative trading possible ?- The answer will be- "Maybe". As of now the WTI crude is trading at $19.69/barrel. So if the lockdown stays in place and with a decreasing demand for petrol, jet fuels, decrease in industrial demands, storages filling up there will be another negative oil trading day, but if these restrictions are lifted the demand will be high again and then the negative pricing won't be a issue. Even the oil drilling can not be stopped "because for production some wells depends on pressure that a shut-off complicates" says billionaire Howard marks (https://www.cnbc.com/2020/04/22/billionaire-investor-howard-marks-calls-oil-crash-completely-rational.html). So even if they do go negative there is nothing to panic as right now due to lack of storage they are being traded as a liability and once the consumption starts these prices will definitely bounce back.

  • BRENT or WTI- To make it clear both of these are different oil types and are named on the basis of their country of origin. WTI is produced from shale as is practiced in USA and BRENT is produced in north sea using off-shore drilling method. We wouldn’t get negative prices for Brent because Brent is the world market and it would require something cataclysmic for the world economy to get a negative Brent price, secondly, BRENT is cash settled and WTI is physically settled hence the storage problem which is the main reason for the negative prices wont be seen in the case of BRENT.

  • Why India won't benefit- India's 83% oil imports are from Middle eastern countries like Iraq, UAE, Kuwait, and then about 3% from the USA hence a price fall can be expected but nothing as drastic as the USA. Another reason is since India is not a oil producer, government interference like dealer commission, Center exercise will be increased so as to tackle the pandemic situation. Even the Indian oil reserves are full most of the petrol pumps are overflowing and thus to make most of the cheap oil prices India will be filling up it's strategic oil reserves now with it's own money India has three strategic petroleum reserves at Vizag (1.3 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes),as a country, we get cheap oil quickly for our caverns while helping resolve the storage problem for refiners. So for Indian importers the price may drop but for the consumers it wont, but the government can benefit due to a high increase in taxes.

The Final call and trading behavior-

So what we can conclude and say is that oil is trading at such a price not due to some problem with oil but due to the lack of demand (thanks to coronavirus), Lack of storages and excess supply. In 2014, when former President Mr. Barack Obama was building oil storages WTI and Florida failed to comply and kept on producing oil then came the oil war and coronavirus in 2019 and finally they started running out of spaces, therefore causing these historically low prices. Thus as developing countries are trying to make most of this low oil pricing the oil producing giants are still fighting for a way to reduce outputs and sell these excess oil barrels to make space for new and to stop another negative fall in oil pricing.

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