For the world energy market that’s struggling to stay afloat in these highly challenging times, the fall in the price of US crude WTI (West Texas Intermediate) futures into the negative territory (-$36 a barrel) on Monday for a brief while will remain etched in memory for a long time.

Supply glut, overflowing storage installations and worse, demand destruction following the lockdown of many countries across the world in the wake of the Covid-19 pandemic combined to create this historic price movement for the first time in recent energy market history.

US production

Even as OPEC+ agreed to cut oil production by 9.7 million barrels a day (mbd), the US disappointed the market by not imposing any output cut. In other words, the US oil production will be unrestricted, unlike the OPEC+. To be sure, currently at 12.7 mbd, the US is the world’s largest oil producer.

The implication of negative price is profound. It means producers with large stocks are actually willing to pay money (a price) to the buyers for the latter to take the oil away. This is because producers have little storage space left. Also, they are unable to stop or reduce output quickly.

However, it is important to remember that WTI is more of a US-centric commodity and at the moment the US has more oil than it can handle. Also, price movement into the negative region is a very short-term phenomenon because of the imminent expiry of the May contract.

If anything, WTI recovered to around $2 per barrel. The June contract is trading far higher at $ 20 a barrel. This raises suspicion of forced liquidation or price manipulation in the May contract. Will WTI come under pressure once again towards the end of May if supply-demand fundamentals remain the same? We need to wait and watch.

Demand shock

In commodity markets, usually supply shocks disrupt the market and create volatility. But this time it is different. It is demand shock that’s pushing the market deep down. Even during the global financial crisis of 2008, energy prices collapsed, but did not move into negative territory.

This time the demand destruction is worldwide. The loss of demand is estimated at anything between 25 mbd and 30 mbd, equivalent to 25-30 per cent of the world’s daily production. Given that the end of the pandemic is not in sight as yet, it may take a few quarters for energy consumption to normalise.

Even as WTI plunged, the global benchmark Brent is holding at around $ 20 a barrel. If the pandemic comes under control by June, the energy market will gradually pick up momentum in the second half of the year. After all, the positive correlation between economic growth and energy consumption is well-established.

Assuming global economic activities start to pick up after June, Brent is likely to gradually gather strength and trade around $ 35-40 a barrel towards the last quarter of the year.

Fortuitous for India

For a large, import-dependent consumer such as India, the current low prices are fortuitous. It would be foolish to assume energy market will remain low for a long time. At current prices, it would make immense commercial sense to maximize our strategic reserves in the weeks ahead.

The writer is a policy commentator and global commodities market specialist. Views are personal.

comment COMMENT NOW