How The Historic Crash In Oil Prices Can Hit Indian Traders
An oil rig in the Arabian Sea, off India’s western coast. (Photograph: Wikimedia Commons)

How The Historic Crash In Oil Prices Can Hit Indian Traders

The West Texas Intermediate, the benchmark for America’s oil industry, plunged below zero for the first time in history as the new coronavirus pandemic ravaged demand. And this may not bode well for India’s commodity traders.

The prices on the futures contract for West Texas crude—representing the U.S. shale oil—that is due to expire on Tuesday fell to minus $37.63 a barrel. That’s because with the virus outbreak bringing the whole world to a virtual standstill, there’s so much unused oil that American energy companies are running out of room to store it. And with no storage space, traders don’t want a crude contract that is about to come due.

In India, the April contract of crude oil on the Multi Commodity Exchange expired on Monday. It slumped 30.7 percent at Rs 995 a barrel at the end of trading. The settlement of the MCX contracts, however, will occur after trading in New York ends. That’s because the prices of MCX crude contracts—that expire on the twentieth of every month—are linked to WTI on the New York Mercantile Exchange. The prices are same but converted into Indian rupees. Typically, a minus $37.63 per barrel WTI crude would translate into minus Rs 2,881.5 a barrel at home. MCX closes at 5 p.m. Indian time.

But due to the unprecedented price fluctuation in the international markets, India’s largest commodity exchange is considering a provisional settlement price of Re 1 per barrel for the interim, according to a statement. Differential settlement, if any, on fixation of the final settlement price shall be done subsequently, it said.

“We believe that after consultations with the market regulator and other participants, the final settlement price would be announced,” Navneet Damani, associate vice president at Motilal Oswal Commodities Brokers Pvt. Ltd. “According to our calculations, the settlement price could be around negative Rs 2,700-2,800 per barrel. However, as this is an unprecedented event, we are not sure, how the regulator will look into it.”

Jigar Trivedi, commodity analyst at Anand Rathi, said due to a supply glut, WTI crude prices were hammered. “Sentiment is bearish and will remain the same around the globe for crude. We expect the selling pressure to continue even in future contracts. Signs of production cuts by Russia and Saudi Arabia, and if the same is supported by the U.S., will be a positive and a key thing to watch out.”

Also read: The Oil Price Crash in One Word: ‘Inelasticity’

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