International Oil Prices Plunge To $0; How Will It Affect You?

On Monday, mounting concerns over a decline in demand for fuel due to the COVID-19 pandemic pushed oil prices to new all-time lows. In fact, US WTI fell by more than 100% to and turned negative for the first time in history.

US West Texas Intermediate (WTI) and Brent Crude are the two major benchmarks of oil prices in the international market that are used to buy or sell crude oil.

Why the dramatic fall and will it affect you?

The dramatic fall has been seen in US crude oil price and is a reaction that is generally seen in spot prices when contracts near expiry. Since US WTI's May contract was set to expire on Tuesday, which means that it applies to fuel that is set to be delivered to refineries while most of the US and the world is in lockdown to curb the spread of the coronavirus. This negative price has never happened before for an oil futures contract and may have been because the only buyers of these oil futures contract are entities like a refinery or an airline, which do not need it right now.

However, Indian consumers should note that WTI is a benchmark used for oil prices in North America where it is also produced and also happens to be the region most affected by the pandemic.

On the other hand, Brent is the benchmark used to price two-thirds of oil contracts globally including Indian purcchases.

Though it did not see as dramatic a fall in price on Monday, its June contract settled 8.9 percent lower at $25.57 per barrel and has declined by over 60 percent over the last year.

Brent is the reference point for buyers and sellers of oil in India and also forms a base for setting retail prices for petrol, diesel and other petroleum products sold in India.

What will happen next?

A cut in production will not help the oil prices since the fall in demand as long as there is no sign of returning back to normalcy ahead.

Earlier this month, OPEC (Organization of the Petroleum Exporting Countries) and its allies, which include the world's largest oil-producing nations excluding the US, made an agreement cut production by 9.7 million barrels per day. It's the single largest output cut in history, which may be holding Brent higher than WTI, however, according to analysts, the production cut is not enough to balance the massive fall seen in demand.

With a sharp fall in the number of vehicles running on the road and government-imposed halt on factory activity for non-essential commodity production, the supply of oil has far exceeded the demand across the globe.

Storage tanks of fuel distributors and oil refineries are almost full and new orders are not being placed.

In its closely-watched monthly report, the International Energy Agency (IEA) said demand in April is estimated to be 29 million barrels per day lower than a year ago, hitting a level last seen in 1995.

The stock build-up from a surge in production seen earlier this year is threatening to overwhelm ships, pipelines and storage tanks.

The IEA said it was encouraged by the "solidarity" shown by policymakers from producing and consuming countries, but warned there was "clearly a long way to go before we can pun the Covid-19 crisis behind us."

How will it affect India?

Crude oil is one of the biggest items on India's import bill. As a country that is still largely dependent on fuel for its economic activities, the fall in oil price is good for its fiscal deficit. It will also place less pressure on the Indian rupee that is already trading at over 76/dollar and will also help curb inflation.

Low oil prices will also allow the government to increase taxes on fuel, a large source of revenue for the states and well as central government, considering the expenditure they have incurred to curb the impact of COVID-19 on the residents.

On Tuesday, petrol and diesel prices have remained unchanged for the 35th consecutive day, despite a correction in oil prices. Note that petrol and diesel prices are revised every day at 6 am by government-owned oil marketing companies based on Brent's movement, rupee's value and taxes imposed by the state, central and local authorities.

Meanwhile, the fall in prices may benefit airlines, paint makers and oil marketing companies who can purchase inventories at a cheaper rate.

If you are an investor, some stocks may gain, but overall creates a negative sentiment for stock market investors as a fall in oil demand is considered as low economic activity.