WTI DOWN BUT PETROL PRICES GOING NOWHERE

about 4 months ago
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The jokes doing the rounds today:

Q: What do you say when the market offers to pay you to give you oil?

A: Sorry, no tanks!

That’s really the irony of it all. Today oil prices are low but we are not buying because we simply have no more place to store. Our fuel demand has fallen by a huge 50% simply because there is no economic activity and it’s a complete lockdown.

But the shocker was seeing a historic decline, sending the oil price into the negative yesterday night. But more than demand and supply, “technical” reason was behind the fall below $0 per barrel. Yes, there is excess supply of oil while demand is a just for a trickle but it more due to lack of space for storage that excess supply which drove the price into the negative.

The negative that we saw was mainly on account of expiration of the futures. Very thin trading volume ahead of today’s expiration, on concerns of no storage space is what pushed the prices down. If one looks at the WTI or West Texas Intermediate, the June contract dropped only around 10% to $22/barrel while Brent crude, which the world benchmark, fell by just 5% to $26.50/barrel.

So does all this mean that when you to fill your tank, the petrol pump will pay you the money to the fuel and not vice versa? Well, for Indians, this will have zero or very marginal, unnoticeable impact on the fuel prices.

Biggest reason – India, meaning the PSU oil companies do not depend on the WTI Index; major portion of our fuel coms from Middle East and these are based on the Brent crude, which even now is at $22.41/barrel and the Indian basket is priced at $20.56. Also, the futures oil trading on MCX CCL trading exchange in the country is next to zero.

In India, the major portion of the retail price of fuel comprises of taxes to both state as well as Center; in fact taxes were hiked a month ago by Rs.3/litre on petrol and diesel.  That explains why despite prices globally going down, in India price has remained where it was before the lockdown, despite demand having come down almost 50%.

Also take into account the depreciating rupee – the falling rupee against the US dollar, depreciating almost 8% since the beginning of the year, has eaten away all the gain made on account of falling global crude prices.

So don’t rush to fill up your tank in this lockdown; its not worth it. Yes, today global price of oil is cheaper than a year’s subscription of Netflix but for us, the price drop is only notional. Best is to forget the car for some time, your not going anywhere; instead sit and binge watch to ward off all stress.

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