Explained: What the US oil flash crash means for India, consumers

By Aman Malik

  • 21 Apr 2020
Explained: What the US oil flash crash means for India, consumers
Credit: 123RF.com

On Monday night India time, history was created when the US benchmark oil contract price fell below zero. 

The May contract for West Texas Intermediate (WTI) crude oil to be delivered at current price settled at minus $37.6 a barrel. 

This suggests an imbalance in supply and demand especially in the US where several lockdowns are in effect. 


However, the international benchmark, which is Brent crude, is trading in positive territory although at lower prices.

So does this mean that oil has lost all value?

Not really. The negative price on the WTI benchmark was for physical delivery for the month of May. Monday was the last day for May contracts, also called the “expiry date”. 


The crash happened as traders scrambled to offload contracts for just about any price as they did not want to take physical delivery and incur storage costs for a commodity that is seeing virtually no demand in the market.

Below-zero prices mean traders were paying other market participants to take the oil off their hands.

Already, there is no storage left in Cushing as a crude glut has filled up all containers. Cushing is at the centre of the US oil pipeline network. 


On the other hand, Brent crude, the international benchmark, is seaborne, making storage less and hence better protected against such a flash crash.

WTI Contracts for June and later are still in the positive territory.

However, the contract to deliver oil in May is the most commonly traded of late, therefore it is the best proxy for the current oil price -- that is before the June contract becomes the new benchmark.  


But can oil futures for June plummet?

Oil price is a function of demand and supply. So if there is no demand and there remains a glut, June futures can fall further below the $20 a barrel they are currently trading at. 

So, can importers like India benefit?


India imports most of its crude oil requirements and is one of the largest importers of crude in the world. 

So, in theory, a lower price of crude oil should help India’s import bill, and consequently its current account deficit. And to some extent, that will happen. 

But, at least in part, oil prices are falling precisely because demand from big importers like India has collapsed, since most of the world is in a partial or complete lockdown to halt the spread of the deadly coronavirus pandemic. 

The other reason, of course, is the fact that large producers like Russia and Saudi Arabia are reportedly still waging a price war in the physical market despite a truce announced a few days back.  

So, even if India wants to take advantage of the price fall, there is not much demand for the commodity at the moment. 

Moreover, as M K Surana, the chairman and managing director of government-owned refiner Hindustan Petroleum Corp Ltd told CNBC-TV18, the fall in WTI prices is not supported by other markers like Brent. 

The fall in the price of crude oil could, however, mean that refiners like HPCL, Bharat Petroleum, Indian Oil and Reliance Industries, could see better gross refining margins (GRMs) going forward, on a quarter-on-quarter basis. 

Can’t India buy cheap crude and store it for future use?

India, like some other countries such as the US and China, has established strategic oil reserves to guard itself against a price shock. The country stores crude at three locations—Visakhapatnam, Mangaluru (Mangalore) and Padur (near Udupi).

In total, India has strategic oil reserves to store about 5.3 million tonnes of crude oil. That’s a fraction of the 207 million tonnes that India imported in the 11 months through February 2020, according to the Petroleum Planning and Analysis Cell.

In other words, India’s strategic reserves are adequate for barely a week of the country’s requirements. So, the benefit to India from storing crude will be extremely limited.

Is the price of petrol and diesel at the pump likely to go down?

Not by much. Both the central and the state governments are cash-strapped and there is every likelihood that they could raise excise in the coming days, to shore up their own finances. 

So, even if Indian refiners manage to get cheaper oil, the consumer is unlikely to benefit much, at least in the foreseeable future. 

Also, India has allowed its currency to depreciate in the last few weeks. So, the fall in the Indian rupee relative to the US dollar could offset some of the gains. 

Could airlines in India benefit from this steep fall in crude oil prices?

In theory, lower prices of aviation turbine fuel or ATF could help. But since all commercial aircraft in India are currently grounded and just a handful of cargo flights are actually operating, Indian airlines are unlikely to see any real benefits.

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