On Tuesday morning, the price of a barrel of benchmark US oil plunged below $0.
Such a steep drop in the oil benchmark prompted strong reactions beyond trading floor
But why did such a drop happen?
“Long story short, investors had bought May futures contracts which are due or expiring next week. Now, due to an over-supply panic-driven investors are selling these contracts in a hurry before the expiry date. Why? Because if they don't they'll be forced to take delivery of the oil barrels and scramble for storage space. There are two factors here, hasty selling and an oversupply of oil. Most experts say that the current oil-demand scenario is like in the 1960s but the oil supply is as of 2020,” says Huban Kasimi, former financial analyst and content marketer.
While the lockdown hasn’t been extended till June as yet, there are chances that it may in several parts of the world. What this means that oil prices may see a crash worse than the current situation. However, in case the lockdown is lifted, the supply glut may reduce. Also, given how the situation has been, there could be a possibility that the demand for oil may not increase even after the lockdown is lifted.
But why only oil? Who not foodgrains? The answer is simple: Grain storage technology has improved shelf life which is why grain futures are relatively stable just now. Also the demand for essentials is still high, despite the lockdown.
And what does this mean for us? While India on Tuesday did not decrease fuel prices, chances are that it may happen in the next few days. This may also result in jet fuel prices also going down, making the already loss-making airline industry grasp for more straws.
For weeks media was full of reports of oil tanker charter prices firming up. These tankers were being used to stock the excess oil produced. By last fortnight, empty crude oil tankers were hard to come by. Now the rentals of these oil tankers are beginning to hurt, and oil prices have been slipping sharply.
Clearly, demand for oil has collapsed thanks to Covid-19 lockdowns, and supply was still high. Among the countries that are likely to be most savagely hit are the US.
Beneficiaries are likely to be big oil importers – especially China and India. But for India it could be a double-edged situation. True, its oil bills will fall. But a drop of oil income in the Middle East will mean a slowdown on fresh recruitment, a slashing down of existing jobs, and stoppage of work on major (ambitious) civil contracts. War torn Iraq was viewed as a goldmine for Indian contractors. Even Abu Dhabi, usually seen to be rolling in surplus cash, opted to debut in the loans market with a request for $2 billion.
That could mean many Indians losing their jobs in the Middle East. India is one of the biggest recipients of remittances (see chart). There could be steep fall in remittances – it was $68.97 billion last year, which is a bit of a climbdown from a peak of $70.14 billion in 2014. Falling remittances and rising unemployment will hit India hard, offsetting some of the benefits accruing from the fall in oil prices.
