Turmoil in world crude oil market

What is the economic impact of Covid-19 pandemic? There have been umpteen reports and forecasts on how the global pandemic triggered by Chinese-born novel coronavirus will push the world economy into an unprecedented recession.

Some expert reports even projected negative growth in the global economy during 2020. But all these are mere forecasts, and nobody clearly knows what is in store for the world and its economy during or post the Covid-19 pandemic.

Also, it is too early to predict what economic loss the pandemic will inflict around the globe. However, the world had a sample taste of what might happen in future when crude oil prices in the US market went into a tailspin and closed deeper into negative territory for the first time in history.

The price of West Texas Intermediate (WTI) crude fell below zero and then slumped to - $40 per barrel before closing at -$37.63/bbl in the trading session on Monday. It continued the negative trend on Tuesday as well.

To put it in layman's words, sellers were paying to buyers for buying the crude oil, not the other way round! Data showed price for futures contract for WTI crude for May delivery nosedived 305 per cent, or by $55.90 on Monday from a high of $18 per barrel on Friday.

WTI crude price is a benchmark for global crude oil prices, the other major benchmark being Brent crude. The crisis that led to the historic fall in WTI crude prices has not happened overnight though.

With operations of aviation and other transport-related operations coming to a standstill across the world due to Covid-19 pandemic, global demand for crude oil plummeted as much as 30 per cent.

As per rough estimates, the world consumes 100 million barrels of crude oil daily. That means due to the corona crisis, the world is consuming less petroleum products to the tune of 30 million barrels every day.

But the production of crude oil has not come down that much, resulting in a supply glut. Traders who bought crude futures in the US market were storing the crude oil in storage facilities after taking deliveries.

That would enable them to sell the crude when demand picks up. But there is no more place to store the crude as storage facilities in the US are close to full now.

As oil futures' contracts for May delivery were slated to expire on Tuesday, traders had no option except taking delivery if they failed to sell the contracts before the expiry.

Therefore, they rushed to dispose the contracts off at the eleventh hour, thus pushing the price into negative zone. For India, any drop in crude oil prices is good news as the country meets 80 per cent of its crude oil consumption needs through imports for which it pays a hefty bill.

Though India buys mostly Brent crude, fall in WTI crude prices will also benefit it as the current phenomenon keeps overall oil prices in check.

But demand for petrol, diesel is also falling in India. However, the price crisis in the oil market is the first sign of what is coming. Is the world heading for a bigger economic crisis than what has been forecast so far? It looks like so.