What is the Negative Pricing of Crude Oil?
Oil Vendors willing to pay to have oil taken off their hands instead of asking for any price otherwise left with no space for keeping the crude oil being produced, its disposal becomes very punitive/ dearer with the strict environment stature globally.
In short, it is the situation of – Oversupply.
Right now, there is so much excess crude sloshing around the US and globally that there is no space to stock the quantity under production &markets producers and traders are literally running out of places to store it – both on land in tanks, and even at sea on oil tankers creating this situation of Glut supply without any corresponding demand & it is due to this when prices turn negative, that signals that it is situation of – Oversupply.
The Impact of Over-supply of crude?
A : Globally:
The average cost of production/barrel (bbl) of crude oil range from US$ 83 to US$ 54-60 varying from Saudi Arabia to USA
The USA where there are relatively new oil producers of shale crude oil by employing borrowed capital/ funds face the brunt compared to Big producers who have already made big fortune &diversify their economies like that of Saudi Arabia.
It will badly impact Russia as its economy was dependent on the export of crude oil and lost the game in war with Saudi Arabia due to the decline of it for deep production cuts to offset the coronavirus demand hit and buoy prices.
Riyadh responded last month by lowering the price it charges for Saudi crude and pumping oil with abandon. That’s when prices really started to nosedive price war and this is also adversely impacting Saudi Arabia also but it is with the strategy to gain the market share in the overall global market.
So in effect, it’s the USA, who is bleeding profusely out of the current situation of Zero $ crude oil or negative pricing and forced President Trump to turn diplomatic requesting truce to Saudi Arabia & Russia.
B: Indian Context
B.1 Short Term Impact:
Looking to the present situation in the Indian context, due to weak demand of petroleum products arising due to the ongoing coronavirus pandemic in India, Indian refiners are not being able to utilise their 100% capacity utilisation in the second month in succession, signifying they are already in situation of buffer supply of crude oil for the procurement contract firmed up for march & April& the underutilisation of capacity is expected to continue for the at least for months of May& June ’2020.
So the next two months, India does not benefit anything out of this prevailing negative pricing of crude oil.
As a result, the OMC companies’ shares will definitely remain under pressure due to reduced volume and inventory carrying costs.
As regards the common man in the form of the pump price of the fuel, no relief is in sight till June.
B.2: Long Term Impact
Its immediate impact will be subdued market scenario of big-ticket investment in India by Saudi Aramco of $15billoins investment in RIL petrochemical venture.
Another set back insight is GOI plan of disinvestment of the BPCL, or creating the mega refinery complex with foreign investment also.
The present glut situation is bound to change the price mechanism & OPEC has to cut the production by another 18-20 mmmbbl/d, I.E BY DOUBLE OF THE QTY RECENTLY DECLARED to offset the present situation taking the coronavirus impact globally.
Prices of ONGC is bound to get a good deal of beating at the stock market as a witness in today’s trade. RIL has a mixed bag of products it may manage with other sectoral gains as it has happened today with the declaration of the investment by FACE book in Jio.
As regards the recession in oil & gas industry is concerned, there may be a temporary Halt on the New Investment on creation of newer capacity of production like in KG Basin in Andhra Pradesh by ONGC but does not call for any recession in the O&G industry.
“Zero $ Price” in Indian users’ context:
Interestingly “Zero $ Price” from the Indian End Users context does not at all mean that you fill-up your fuel tank free of all cost & simply walk off.
As the Pump cost do have besides crude oil cost component, marine freight, insurance loading & unloading in addition to refining cost of somewhere $ 8-10/per bbl add to its local transportation & distribution cost and top of it a heavy component of imbibed GOI Fiscal Tax Cost component to the extent of 40%, which GOI is not likely to SPARE in this current scenario of overall revenue deficit and dismissal outlook of the economy and enhanced cost of medical care being spent in the fight of corona pandemic.
By:
CA Ishwer Chand Garg -Sr Partner (O&G-SME)
G R A N D M A R K & Associates,
Chartered Accountants
PLACE: GURGRAM
DATE: 22ND APRIL’2020
(Views express are the personal views with the sharing the intellectual inputs with like minded Professional fraternity and not for any legal use)
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