On Monday, the WTI (West Texas Intermediate) May-month futures contract in the US crashed into negative territory for the first time in history, triggering panic in the oil and financial markets. There were technical reasons for this crash — primarily, the physical settlement requirement in the soon-to-expire contract triggered a fire sale in a market running out of storage space. To be sure, the WTI June contract (closure about a month away) and the Brent May contract (cash-settled) continued to trade in positive zone despite marked weakness. Yet, the fact that the key benchmark’s price sank below zero, and that sellers were willing to pay buyers as much as $37 a barrel to pick up their crude oil is also reflective of the fundamental deep turmoil in the oil market. A perfect storm — demand obliteration due to the coronavirus-induced global lockdowns, massive oversupply, and storage space running out both on the land and the seas — has upended the oil market. Even a massive 9.7 million barrels per day cut in output by the OPEC+ group of oil producing nations has failed to stem the rout. Lockdowns across the world have cut oil demand by an estimated 25-30 per cent already. The economic carnage induced by lockdowns in major economies is likely to further suppress demand in the near to middle term.

A crash of such magnitude has profound implications for both international politics and the world economy. Economic turmoil may undermine the political stability of several regimes in West Asia, impact Putin’s superpower ambitions and destroy the US’s shale oil industry. It will significantly impact US influence in the region and alter the bargaining power of major oil importing nations like China and India. But today, the demand problem for oil is a much larger one than its supply problem. Oil prices are unlikely to revive until demand recoups — and that seems quite some time away. Even after the coronavirus threat fades, it is unlikely to be business-as-usual for crude. There could be a structural decline in oil consumption due to multiple factors — acceptance of work-from-home, reduced business travel thanks to virtual meetings, and the severe slowdown in economic activity. This should keep a cap on oil prices. This has significant implications for investments in clean and renewable energy sources like solar and wind power. The profound and highly visible impact of the lockdown-induced reduction in mobility on air quality in polluted cities around the world could give a significant impetus to the search for non-polluting transportation alternatives.

For India, that imports most of the oil it consumes, this seems welcome. But there are flip-sides too — including lower remittances from NRIs in West Asia, and lower taxes from petro-products. The upside for refiners from lower input costs will be offset by reduced demand for products. It is imperative to prepare for the new normal in oil, while using the price slump now to fill up reserves.