Brent crude oil dropped to a two-decade low Wednesday, trading at as low as $15.98 a barrel as the global oil rout continued.
One analyst said Brent prices were unlikely to turn negative – as WTI crude oil contracts for May did earlier this week – but could hit zero if storage concerns persisted.
While forecasts have suggested that U.S. oil production could fall by 1 or 2 or 3 million barrels per day (mb/d) by the end of 2021, depending on who you ask, the lack of storage and collapsing prices means that shut ins could begin to mount very quickly. “[T]he physical reality of a still massively oversupplied oil market will likely exert downward pressure on the June WTI contract,” Goldman Sachs analysts wrote on Tuesday. “But with ultimately a finite amount of storage left to fill, production will soon need to fall sizeably to bring the market into balance, finally setting the stage for higher prices once demand gradually recovers.” The May futures contract of West Texas Intermediate (WTI) crude fell into unchartered territory on Monday, with sellers willing to pay buyers $37.63 a barrel to take delivery. The big problem, of course, was that there is hardly any storage capacity available, so buyers were shying away as well. Note that WTI crude futures contracts expiring in September are trading at $30 a barrel.
Since there are more settlement options for Brent crude futures, their prices haven’t fallen as sharply. Even so, Brent crude, which is the more relevant benchmark for India, has dropped over 65% so far in 2020. Still, with the ongoing impact of covid-19 related lockdown, the gains from lower crude oil price get offset to a large extent. “It is imperative to note that the current fall in global crude oil prices is not a pure positive supply shock, which benefits oil consumers like India (at the expense of oil producers) but is also a result of a weak demand induced shock and hence the positive impact on growth gets somewhat offset,” said Tanvee Gupta Jain, economist at UBS Securities India Pvt. Ltd. “The benefits from lower crude prices to India’s fiscal position will be limited as tax collections to the government from the petroleum sector get affected due to slowdown in economic activities owing to Covid-19 shock”
Surjitt sahani
