Negative Crude Oil Price & Geopolitics
What Happened?
Recently, US market saw unprecedented lowest Crude Oil Price below zero at -$40/Barrels of West Texas Intermediate (WTI), one of the Benchmarks of crude oil based on texas, US.
This is one of the lowest Crude prices ever happened in History where the seller's would be paying buyer's to buy Crude Oil.
Benchmarks of Crude Oil
Mainly 3 Benchmarks in the world for Crude oil Production exists, according to its quality and the Geographical Locations of productions.
1. West Texas Intermediate(WTI): This benchmark is based on The Shale oil production based near Texas, US, considered to be one of the best Oil in the world because of its lowest density, easier to refine, and Highest quality.
2. Brent Blend: This benchmark of Crude Oil is extracted from the Northern Sea in Europe.
3. OPEC Basket: This Benchmark is based on Oil being extracted by countries from OPEC (Saudi Arabia, Algeria, UAE, Venezuela, Iran, Iraq, Kuwait, etc) whose Density of Oil is much higher than the other two's.
Economics of Demand & Supply
In the free market, the price of Commodities depends upon its Demand & Supply,
If Demand is High & Supply is Low the price will shoot up, whereas if Supply is high & demand is Low the price gets crumble.
The same trend is followed by Crude Oil, where as per demand & supply Ratio the price deviates.
OPEC
In 1960, Major petroleum export countries ( Saudi Arabia, Iraq, Iran, Kuwait, UAE, Nigeria, etc) came together to make a common consensus to fix the oil production at a specific time to control the oil supply as per Demand in International markets to get mutual benefits by controlling Supply & Demand Ratio & formed Organisation of petroleum exporting countries(OPEC).
Shale Oil Revolution
Pre 2010, US was largest Oil Importing Country but post-2010, The Shale Oil Revolution Happened and from Shale rocks, private US companies start extracting Shale oil and later after 2014 not only become self-sufficient for crude oil but also starts exporting crude oil and in 2019, become worlds largest oil-exporting country challenging oil exporting business of Saudi Arabia and Russia.
2016 OPEC + Deal
Seeing the Challenges Thrown by US Shale oil industries after 2014, the old Major Oil-producing countries, 13 OPEC and 10 non-OPEC nation ( Russia, Mexico, Kazakhstan, etc) struck the deal in 2016 to increase the Oil production by 1 Million Barrels/day to increase the oil supply with the same constant demand to reduce the Crude Oil Price in International Markets to destabilize the Private Shale Oil industries of US.
OPEC+ thought Private Oil players of the US would have succumbed under intense low price cap. This strategy pays partial dividends for OPEC + countries where small industries of the US went Bankrupt but Major Private Players had survived.
OPEC+ Meet in January 2020
Due to the continuous Overproduction of Crude by Opec+ after 2016 deals to disturb US Shale Industries, the Supply-Demand Ratio gets unbalanced drastically causing the colossal reduction of Crude price to $60/Barrel in January 2020 became the cause of a headache for all OPEC+ countries.
OPEC + countries to address the issue, met in January 2020 under the leadership of Saudi Arabia where all OPEC nation agrees to cut their production as per demand but Russia disagreed to cut production and landmark 2016 OPEC+ Deal fractured.
Reasons for refusal of Russia
1. Russia doesn't want to lose its oil trade share from the international market because oil production reduction causes them to supply less oil and probably would transfer their Traders & Buyers toward US oil industries which would have been selling oil with the same supply Rate.
2. Reducing or Stopping such a huge Oil production suddenly and returning back to the previous rate of oil production later would prove to be very costly and cumbersome.
Seeing the disagreement of Russia, Saudi Arabia on Retaliatory measures against Russia starts producing Crude Oil in higher amounts and the Crude Oil war started between both, and both Nations along with the US starts overproducing Crude oil making a Glut of Crude oil in International Markets.
Future Contract
The concept of Future contract is important to understand the Volatile price of Crude.
3 Players are Involved in crude Oil Businesses,
Seller: The Organisation who extracts and sells Crude.
Traders: The Middlemen who virtually purchase Specific amount of crude in the future for specific price Known as "Future Contract" without taking Crude Physically.
Buyers: The organization(Oil Refineries) who purchase Crude oil from Traders.
Reasons for Oil Price Plummet
The Traders Invest in Future Contracting of Crude as an investment to earn incomes from Volatile price shifts.
Recently the Future contracts of Crude from WTI for the month of May were ending on 21st April, i.e, all the Traders who had virtually purchased the crude needed to sell them all to desired Buyers otherwise after the last date all oils, needed to be taken Physically by Traders.
Due to COVID19, all transportation & factories being shut, consumptions had reduced drastically by 10 Million barrels /Day causing no Buyers to be interested in buying, but keeping a plethora of Oil requires high Rent for Storage Tank and its Transportation cost, hence on the last day, Traders Plummented Cost to -$40/Barrels, reversely paying to Buyers to get rid of the heavy cost incorporated with its storage.
The Producers too want to sold Oil at the lowest cost without stopping the oil production as restarting it after, could prove to be even costlier.
Conclusion
Oil Importing countries like India, China, Japan, etc should utilize such a moment to increase their strategic oil reserves for the future and accumulate as much as Crude oil.
Oil Exporting countries mainly Saudi Arabia, Russia&US should stop this cold war of oil production & with consensus should maintain the Supply-Demand ratio to get Respectable Crude price in Future.
Recently, US market saw unprecedented lowest Crude Oil Price below zero at -$40/Barrels of West Texas Intermediate (WTI), one of the Benchmarks of crude oil based on texas, US.
This is one of the lowest Crude prices ever happened in History where the seller's would be paying buyer's to buy Crude Oil.
Benchmarks of Crude Oil
Mainly 3 Benchmarks in the world for Crude oil Production exists, according to its quality and the Geographical Locations of productions.
1. West Texas Intermediate(WTI): This benchmark is based on The Shale oil production based near Texas, US, considered to be one of the best Oil in the world because of its lowest density, easier to refine, and Highest quality.
2. Brent Blend: This benchmark of Crude Oil is extracted from the Northern Sea in Europe.
3. OPEC Basket: This Benchmark is based on Oil being extracted by countries from OPEC (Saudi Arabia, Algeria, UAE, Venezuela, Iran, Iraq, Kuwait, etc) whose Density of Oil is much higher than the other two's.
Economics of Demand & Supply
In the free market, the price of Commodities depends upon its Demand & Supply,
If Demand is High & Supply is Low the price will shoot up, whereas if Supply is high & demand is Low the price gets crumble.
The same trend is followed by Crude Oil, where as per demand & supply Ratio the price deviates.
OPEC
In 1960, Major petroleum export countries ( Saudi Arabia, Iraq, Iran, Kuwait, UAE, Nigeria, etc) came together to make a common consensus to fix the oil production at a specific time to control the oil supply as per Demand in International markets to get mutual benefits by controlling Supply & Demand Ratio & formed Organisation of petroleum exporting countries(OPEC).
Shale Oil Revolution
Pre 2010, US was largest Oil Importing Country but post-2010, The Shale Oil Revolution Happened and from Shale rocks, private US companies start extracting Shale oil and later after 2014 not only become self-sufficient for crude oil but also starts exporting crude oil and in 2019, become worlds largest oil-exporting country challenging oil exporting business of Saudi Arabia and Russia.
2016 OPEC + Deal
Seeing the Challenges Thrown by US Shale oil industries after 2014, the old Major Oil-producing countries, 13 OPEC and 10 non-OPEC nation ( Russia, Mexico, Kazakhstan, etc) struck the deal in 2016 to increase the Oil production by 1 Million Barrels/day to increase the oil supply with the same constant demand to reduce the Crude Oil Price in International Markets to destabilize the Private Shale Oil industries of US.
OPEC+ thought Private Oil players of the US would have succumbed under intense low price cap. This strategy pays partial dividends for OPEC + countries where small industries of the US went Bankrupt but Major Private Players had survived.
OPEC+ Meet in January 2020
Due to the continuous Overproduction of Crude by Opec+ after 2016 deals to disturb US Shale Industries, the Supply-Demand Ratio gets unbalanced drastically causing the colossal reduction of Crude price to $60/Barrel in January 2020 became the cause of a headache for all OPEC+ countries.
OPEC + countries to address the issue, met in January 2020 under the leadership of Saudi Arabia where all OPEC nation agrees to cut their production as per demand but Russia disagreed to cut production and landmark 2016 OPEC+ Deal fractured.
Reasons for refusal of Russia
1. Russia doesn't want to lose its oil trade share from the international market because oil production reduction causes them to supply less oil and probably would transfer their Traders & Buyers toward US oil industries which would have been selling oil with the same supply Rate.
2. Reducing or Stopping such a huge Oil production suddenly and returning back to the previous rate of oil production later would prove to be very costly and cumbersome.
Seeing the disagreement of Russia, Saudi Arabia on Retaliatory measures against Russia starts producing Crude Oil in higher amounts and the Crude Oil war started between both, and both Nations along with the US starts overproducing Crude oil making a Glut of Crude oil in International Markets.
Future Contract
The concept of Future contract is important to understand the Volatile price of Crude.
3 Players are Involved in crude Oil Businesses,
Seller: The Organisation who extracts and sells Crude.
Traders: The Middlemen who virtually purchase Specific amount of crude in the future for specific price Known as "Future Contract" without taking Crude Physically.
Buyers: The organization(Oil Refineries) who purchase Crude oil from Traders.
Reasons for Oil Price Plummet
The Traders Invest in Future Contracting of Crude as an investment to earn incomes from Volatile price shifts.
Recently the Future contracts of Crude from WTI for the month of May were ending on 21st April, i.e, all the Traders who had virtually purchased the crude needed to sell them all to desired Buyers otherwise after the last date all oils, needed to be taken Physically by Traders.
Due to COVID19, all transportation & factories being shut, consumptions had reduced drastically by 10 Million barrels /Day causing no Buyers to be interested in buying, but keeping a plethora of Oil requires high Rent for Storage Tank and its Transportation cost, hence on the last day, Traders Plummented Cost to -$40/Barrels, reversely paying to Buyers to get rid of the heavy cost incorporated with its storage.
The Producers too want to sold Oil at the lowest cost without stopping the oil production as restarting it after, could prove to be even costlier.
Conclusion
Oil Importing countries like India, China, Japan, etc should utilize such a moment to increase their strategic oil reserves for the future and accumulate as much as Crude oil.
Oil Exporting countries mainly Saudi Arabia, Russia&US should stop this cold war of oil production & with consensus should maintain the Supply-Demand ratio to get Respectable Crude price in Future.
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