May , 2020
Deluge in supply disrupting the oil market
14:54 pm

Kuntala Sarkar


The global oil market which was already suffering from a bleak price structure since the Gulf War has reached an all-time low ‘price for oil per barrel’ - at $40.32 per barrel - as on April 20, 2020. For the first time in history, the West Texas Intermediate (WTI) benchmark went to a negative contract. Investors are continuing to behave adversely to buy future contracts for the month of May. It is also uncertain whether the situation would change in June or remain the same. The worldwide lockdown due to the corona pandemic has drastically dropped the demand for crude oil. Apart from freight and emergency services, all other public transports are restricted, air freights are shut and most of the manufacturing factories are closed. Such unforeseen circumstances have pulled down the global demand for oil.

In an OPEC+ meeting in the first week of March 2020 in Vienna, international oil traders and producers witnessed a turmoil. The global market was already witnessing low demand and Russia did not agree to lower its crude oil production at that point. This stance by Russia later forced Saudi Arabia to increase its production. That was the first shock for the global oil market which slashed the global crude price by more than 50% per barrel due to a huge demand-supply imbalance. Finally, on April 13, OPEC+ countries came to an agreement to cut the production to 9.7 million barrels per day from May to stabilise the price. The production restrain will remain for upcoming two years. But even after this decision, the agreement failed to save the biggest oil benchmarks from falling drastically.

Oil reserves flooding

Since the demand for oil fell suddenly, the market is now flushed with oil reserves. Major oil producing countries decided to partially stop their production but the storages are already full. The Oklahoma reserve in the US is virtually full and oil trading companies in the US is offering to sell their oil reserves. Along with the US, major oil producing countries are replicating a similar picture which has impacted the stock market. After the price went negative in late April, US President Donald Trump stated in a press meet, “We are filling up our national Strategic Petroleum Reserve (SPR) and looking to put as much as 75 million barrels. That would top it out. We would get it for the right price. Now the companies are paying to buy oil from them but that is a short-term squeeze.”

Saudi Arabia is in the backfoot

Saudi Arabia, the de-facto leader of OPEC is still the highest oil exporting country but is under immense pressure. China, Italy, Spain, Germany, and France which are the highest affected countries of the Covid-19 pandemic are among their major oil importing countries. Crash in the economies of these countries  has directly impacted Saudi’s oil export. Additionally, refineries seem to be reluctant to produce gasoline, diesel and other products as their demands have collapsed.

Where India stands

India is the third largest crude consumer with a significant amount of import. The situation is benefitting the country. It will help India to shorten its oil bills. But the central government seems unwilling to pass on the benefit of the price drop to the market. It has immediately increased the cess-tax on fuel prices which led to a price hike of Rs 3 per litre in the country. The end consumers are unable to benefit from the price plunge. Market insiders are expecting the government to boost its reserves from this collection of an additional revenue of `39,000 crore. Speaking on the impact of the present coronavirus outbreak in the country and the lockdown period, Kalikrishna M, Executive Director, Corporate Communications, Indian Oil, told BE, “Indian Oil continues to maintain normal operations at its refineries, pipelines, and marketing locations. Additionally, over 115 Indian Oil aviation fuelling stations across the country are operating. The corporation has reduced aviation fuel prices in line with international prices of the product. We will revise aviation fuel prices every fortnight.”

India along with other countries is planning to take a big shift towards green or renewable energy for ensuring sustainable growth. India might benefit from this drop of oil prices as it is a major oil importing country but its renewable energy aspirations may take a backseat with reduced oil prices. During the lockdown, the country has already missed 24% of its solar power target. The volatility in the crude oil prices and in availability of stock will impact the overall Indian energy market in near future.


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