Crude Oil price drops to a record low below $0 : Explained by molitics

The US crude West Texas Intermediate (WTI) slumped below $0 per barrel for the first time in history while its peer Brent comparatively remained stable, dropping 9 per cent to $25.57 a barrel. Here is an explainer of what WTI is, and how and why it fell to an unprecedented level on Monday.

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What are Grades of Oil

Three main grades or benchmarks for oil are- WTI, Brent and Dubai/Oman. Almost all of the crude oil prices are pegged to the three grades.

Oil Grades Trading

WtTI is considerably light by the virtue of its low density and low sulphur content. However, Brent is lighter than WTI. Trades related to WTI take place in The New York Mercentile Exchange, like wise Brent contracts on the ICE Future Europe and Dubai grade on the Dubai Mercentile Exchange.

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Oil Futures and Their Functioning

Oil futures played a pivotal role in the fall of WTI. These Futures are basically future contracts and also they are highlt volatile. Under such contracts between the sellers and buyers, a specific date of delivery of a specific amount of oil is decided between the two parties. These oil futures are traded on advance basis in light of the fact that the extraction of oil and its delivery followed by that are time consuming. Most of the factories require consistent supply of oil to run smoothly, and the future contracts ensure this requirement.

WTI price falls below $0. Why?

The major three reasons for which the WTI price plummeted to a record low are; A substantial decrease in demand, lack of storage facility and finally the expiration of the future contracts. Demand declined in light of the impact of coronavirus on the global economy, while refineries rejected WTI crude oil supply because the storage has reached to the brim. Under futures contract, WTI needs to be physically delivered while Brent is deliverable offshore. Given logistics and storage constraints in Cushing, Oklahoma (where WTI is stored) for physical crude amidst low demand, traders started selling Tuesday's futures to avoid taking physical delivery. This pushed WTI price into the negative territory on Monday.

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Oil storage capacity problem

Due to the massive oversupply on Monday, traders rushed to find storage on land and at sea in what is believed to be the biggest oil glut in history. Fuel storage rates doubled this month in some onshore European and US hubs as traders rushed to secure tanks in the hope of selling their products at a higher price when the coronavirus outbreak eases and demand recovers.

Floating capacity explained

Oil can be stored in very large crude carriers (VLCCs), commonly known as supertankers. On Monday, oil held in floating storages on tankers reached at least 160 million barrels, including 60 supertankers, which can each hold 2 million barrels. This can be compared with 25 to 40 VLCCs already chartered with storage options at the start of April and fewer than 10 VLCCs in February. The last time floating storage reached levels close to this was in 2009, when traders stored over 100 million barrels at sea before offloading stocks.

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Will the fall in WTI price benefit UAE

Due to the contagion effect from the fall in WTI and Brent prices, it is highly likely that the benchmarks on which UAE oil prices are fixed each month will go lower. Therefore, we could see lower oil prices for UAE residents in May 2020. UAE retail oil prices are based on S&P Global Platts, which is a benchmark for refined petroleum products. UAE Retail Pricing Committee for Refined Petroleum Products adds margin and transportation/logistics cost etc. to the Platts prices to arrive at the retail prices for refined petroleum products each month. Global Platts price changes are linked directly to the changes in Brent crude.

Impact on the airline sector

For cash-strapped airlines, the decline in crude prices will make it cheaper to operate flights that are already nearly empty as people remain homebound due to the coronavirus.
The plunge in crude futures also indicates that the market does not expect airlines to add back many flights to their slimmed-down networks any time soon,

source: https://www.molitics.in/article/677/Oil-drops-to-a-new-low