Explained: Why did oil prices turn negative in the US and what does it mean for Indian consumers?

 Explained: Why did oil prices turn negative in the US and what does it mean for Indian consumers?

The trend has spilled over to WTI June 2020 deliveries, which could also be well on their way into the red as we move towards physical delivery dates

Bilal AbdiETEnergyWorldUpdated: April 22, 2020, 07:23 IST

Explained: Why did oil prices turn negative in the US and what does it mean for Indian consumers?New Delhi: Global oil markets have faced unprecedented developments in the last few weeks, with the most recent being US oil marker- West Texas Intermediate- falling to as low as -$37 per barrel on Monday trading. ETEnergyWorld explains what are oil futures, why US oil prices were pushed in the negative territory and whether India can gain from fall in oil prices in the US.

What are crude oil futures?

Crude oil futures are contracts where buyers and sellers of oil agree to deliver a specific quantity of crude oil on a given date in the future at a specific price. In oil futures one contract represents 1,000 barrels of crude oil and an oil future contract can be closed either by physically taking delivery of the oil or by settling the contract by selling it to another buyer in exchange for money.

Each region has a different marker for its traded crude oil, for example West Texas Intermediate (WTI), traded on the Nymex exchange gives an indication of the price of crude oil produced from US oil fields, while Brent crude oil traded on Interncontinental Exchange (ICE), London, gives an indication of the price of crude oil produced from the North Sea, Atlantic Ocean.

Brent crude price marker is considered a global benchmark, as nearly two-thirds of the world’s oil is traded based on Brent crude prices.

What happened to WTI prices on Monday?

To put simply, WTI May-dated future contracts expire on 21 April, which essentially require buyers of WTI future contracts to either take delivery of the contracted volume from Cushing, Oklahoma or close the contracts by selling it at whatever price possible in order to avoid taking physical delivery of the crude.

In this case sellers were offering money to buyers to purchase crude oil.

The dumping of WTI May-dated future contracts on Monday resulted in prices diving to negative $37 per barrel, an indication of spare storage capacity in the region, research analysts told ETEnergyWorld.

“Too many sellers and few buyers led to this situation, sellers wanted to close the contracts at any cost resulting in prices reaching as low as negative $37 per barrel. It is an aberration in the market because of near-term concerns on physical storage of crude,” K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings at rating agency ICRA told ETEnergyWorld.

According to Yaw Yan Chong, director, oil research at Refinitiv negative price means that producers are willing to pay a certain amount of money, $37.63 per barrel at Monday's close, to have the oil taken away from them, indicating that the excess supplies have exceeded the capacity to store them.