OIL'S HISTORIC CRASH AND REPERCUSSIONS

Posted Date: June 17 2020

U.S. oil’s slide into the negative territory triggered a flurry of speculation, sending market participants across the world into a tizzy. Economics of crude oil turned into the talk of the town as the world gauged the impact of a historic crash in WTI crude oil prices on the global economy. The unexpected turn of events unfolded after technical factors got triggered in the face of May futures’ expiry. Unwillingness among investors to accept physical delivery at the time of settlement forced them to dump their contracts at all costs, resulting in negative prices. It was the lack of inventory to store crude that investors embraced the idea of paying to get these front-month contracts off their hands. In the preceding three weeks, crude oil inventories at Cushing, Oklaho- ma had surged 40%, according to consensus, and were forecast to hit the peak of ~78mb by the end of May.
One pertinent question was, why were June futures priced at $20 a barrel when May WTI futures turned negative? This could be due to a couple of reasons:
1. Demand may recover by June as lockdowns are lifted across the world, and economic activity resumes. 2. Consensus expects that storage space to be freed up as existing inventory draws down.
Now, let us try to understand how crude oil price gets impacted, the economics of production cost, the impact of crude oil price on gas price, impact on India’s economy, and sectors and stocks in focus due to crude oil.

What do you think? Please email us any questions or comments.

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