The negative price of oil according to the WTI shows how much oil oversupply exists in international markets today. Global oil consumption has fallen due to the Covid-19 pandemic that traders are willing to pay customers to get rid of the barrels they can’t store. The world does not have enough storage capacity, and dumping the oil is an environmental crime.
The negative price has no direct impact on India or Indian oil prices, as this has taken place due to crude oil produced and traded within the U.S. India’s prices are driven partly by another benchmark, the Brent, which is still trading at $25/barrel. Therefore, the retail price of fuels in India are unlikely to fall.
India imports 4 million barrels/day (1.4 billion barrels/year) of oil. The country has been benefitting from the falling prices of oil for the last five years, when oil dropped from a peak of $110/barrel to $50-60/barrel last year, enabling India to invest in public service programmes.
However, the additional $30 fall of this week is good for India – but there is also a down side. If oil prices are too low, the economies of oil rich gulf countries will be hurt, threatening the job prospects of the 8 million Indians working in the gulf countries. India is the largest recipient of foreign remittances due to these workers – very low oil prices will hurt this cash stream.
The key for oil producers now, will be to lock in demand. India, with its large and growing market, will be a key guarantor of demand security, especially for the Gulf countries. India needs to renegotiate this status to work out new economic and political arrangements with the oil exporting countries.
India can also lead the creation of a new oil benchmark, one that reflects the new reality. The negative price of the WTI shows it is no longer a reliable benchmark for oil. Brent, the other major benchmark, reflects oil consumption patterns of the 1980s – no more relevant for the world’s largest oil importers which are in Asia, especially India. Well-functioning markets require transparent and reliable prices, reflective of current markets. As a major consumer with liquid financial markets, India must take the lead and create a new benchmark like a petro rupee, which represents the new reality of the oil market.