Crude oil Epic Fall

CRUDE OIL: The epic fall

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The Corona virus outbreak has put breaks to almost everything happening around the world. Most of the cities around the world are in a state of lockdown, which means people have been instructed to stay quarantined at their homes. Strict laws are being established on sale of goods and services, so that social distancing can be maintained, and more lives can be saved.

The epidemic is already in it is third stage in many countries and has resulted in over 1,96,000 deaths with more than 2. 79 million people cases worldwide. If we talk about our own country, the scenario is not much different from the rest of the world, there are 24, 506 confirmed cases till date out of 775 people have lost their lives to this epidemic and these numbers would have increased by the time you finish reading this blog. So, in order to stop the spread all the affected countries have announced an indefinite lockdown which depends on the recovery rate of a certain country.

This lockdown has seen huge drop in the demand for crude oil. As, most of the production units in the heavy industries, automobiles and factories have stopped functioning, there is hardly any requirement for this precious mineral resource in bulk.

According to a report, the oil market has experienced high turbulence due to the epidemic and has seen a 30 percent fall in demand, which is a big number. Both, The US and Brent crude saw huge loss for three straight weeks because of a global shutdown of all major production units. According to the report, Brent crude fell 3.42% or 73 cents.

The major problem which cannot be overlooked is that the storage units are filling up globally. This excess storage will eventually result in cuts in production of more Oil. In fact, Organization of the Petroleum exporting countries (OPEC) and their allies have decided to cut down production by 9.7 million bpd. Russia has planned on cutting down oil exports in May by half, the largest oil producer in North Dakota, Continental Resources Inc. has also stopped most of its production.

The global storage is already rising and if reports are to believe the onshore oil storage is filled with oil that covers 85 percent of its total capacity. This is not a good sign because once this lockdown ends the demand for crude oil is going rise like wild fire and at the same time all the crude oil production units will try to make up for the losses following which most production units have put a halt on all future investments and are looking to delay any further projects for a while .

These delays are going to shrink the supply of oil and gas globally and this is expected to slash the global supply by 6.3% by 2030 as $195 billion worth of non-shale projects are estimated to get delayed.

However, this global price fall of Crude Oil may turn out to be a boon for the Economy. According to the Kotak Institutional equities research, the Indian economy will see remarkable benefits from the fall in International crude oil prices in the form of lower current account deficit, higher GDP and a reduced rate of inflation.

Kotak said in a note, “Lower oil prices provide significant tailwinds to the Indian economy in the form of lower current account (50 basis points of GDP or $15 billion for every $10 a barrel decline in crude prices), lower inflation (30 bps for every $10/bbl fall) and improved government finances/household savings”.  If reports are to be believed this maybe a chance for Indian economy to come out of an 11-year slump in existing growth rate and high rate of inflation.

The Outbreak which started in the China is at its peak and has affected more than 200 countries and other territories and is going to persist for a few more months. This means demand for transportation and production is going to stay stagnant for a long time. We are experiencing something which has not been seen before or dealt with, it is important that we stay hopeful in these times and try to keep ourselves safe. Let us hope the fall in prices have something good in store for all of us. This too shall pass away.

Stay home, stay safe.

                                           (Source: The Economic times,Moneycontrol.com)

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