Crude Oil price drops to a record low below $0 : Eplained by molitics
by Tanvi Katyal Molitics - Media of PoliticsThe US crude West Texas Intermediate (WTI) slumped below $0 per barrel for the first time in history while its peer Brent comparatively remained stable, dropping 9 per cent to $25.57 a barrel. Here is an explainer of what WTI is, and how and why it fell to an unprecedented level on Monday.
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What are Grades of Oil
Three
main grades or benchmarks for oil are- WTI, Brent and Dubai/Oman.
Almost all of the crude oil prices are pegged to the three grades.
Oil Grades Trading
WtTI
is considerably light by the virtue of its low density and low sulphur
content. However, Brent is lighter than WTI. Trades related to WTI take
place in The New York Mercentile Exchange, like wise Brent contracts on
the ICE Future Europe and Dubai grade on the Dubai Mercentile Exchange.
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Oil Futures and Their Functioning
Oil
futures played a pivotal role in the fall of WTI. These Futures are
basically future contracts and also they are highlt volatile. Under such
contracts between the sellers and buyers, a specific date of delivery
of a specific amount of oil is decided between the two parties. These
oil futures are traded on advance basis in light of the fact that the
extraction of oil and its delivery followed by that are time consuming.
Most of the factories require consistent supply of oil to run smoothly,
and the future contracts ensure this requirement.
WTI price falls below $0. Why?
The
major three reasons for which the WTI price plummeted to a record low
are; A substantial decrease in demand, lack of storage facility and
finally the expiration of the future contracts. Demand declined in light
of the impact of coronavirus on the global economy, while refineries
rejected WTI crude oil supply because the storage has reached to the
brim. Under futures contract, WTI needs to be physically delivered while
Brent is deliverable offshore. Given logistics and storage constraints
in Cushing, Oklahoma (where WTI is stored) for physical crude amidst low
demand, traders started selling Tuesday's futures to avoid taking
physical delivery. This pushed WTI price into the negative territory on
Monday.
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Oil storage capacity problem
Due
to the massive oversupply on Monday, traders rushed to find storage on
land and at sea in what is believed to be the biggest oil glut in
history. Fuel storage rates doubled this month in some onshore European
and US hubs as traders rushed to secure tanks in the hope of selling
their products at a higher price when the coronavirus outbreak eases and
demand recovers.
Floating capacity explained
Oil
can be stored in very large crude carriers (VLCCs), commonly known as
supertankers. On Monday, oil held in floating storages on tankers
reached at least 160 million barrels, including 60 supertankers, which
can each hold 2 million barrels. This can be compared with 25 to 40
VLCCs already chartered with storage options at the start of April and
fewer than 10 VLCCs in February. The last time floating storage reached
levels close to this was in 2009, when traders stored over 100 million
barrels at sea before offloading stocks.
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Will the fall in WTI price benefit UAE
Due
to the contagion effect from the fall in WTI and Brent prices, it is
highly likely that the benchmarks on which UAE oil prices are fixed each
month will go lower. Therefore, we could see lower oil prices for UAE
residents in May 2020. UAE retail oil prices are based on S&P Global
Platts, which is a benchmark for refined petroleum products. UAE Retail
Pricing Committee for Refined Petroleum Products adds margin and
transportation/logistics cost etc. to the Platts prices to arrive at the
retail prices for refined petroleum products each month. Global Platts
price changes are linked directly to the changes in Brent crude.
Impact on the airline sector
For
cash-strapped airlines, the decline in crude prices will make it
cheaper to operate flights that are already nearly empty as people
remain homebound due to the coronavirus.
The
plunge in crude futures also indicates that the market does not expect
airlines to add back many flights to their slimmed-down networks any
time soon,
source: https://www.molitics.in/article/677/Oil-drops-to-a-new-low
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Created on Apr 23rd 2020 09:27. Viewed 266 times.