The world is struggling with an ongoing coronavirus pandemic. The deadly disease has prompted lockdown, shuttered factories and stopped people from traveling.
One cannot believe that the price of any commodity can turn negative. However, that’s just happened to oil prices. Benchmark US crude oil prices traded with negative prices for the first time in history.
Earlier in March, the world witnessed an oil price war between Russia and Saudi Arabia, which impacted the world economy baldy.
Let’s take an in-depth review of the negative trend of oil price, reasons, and how Pakistan can take benefit from it?
Oil prices turned negative
On Monday (April 20, 2020), The US oil prices crashed into negative territory for the first time in history. The West Texas Intermediate (WTI) traded as low as -$40.32 a barrel in a day of chaos in the oil market. The settlement price on Monday was -$37.63, compared to $18.27 on Friday.
That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May.
However, WTI contracts for delivery in June are still trading above $20 a barrel, even though they have fallen from near $60 at the start of the year.
Reasons
The price crash came as the US benchmark oil contract – WTI – headed towards its expiry date for May delivery, the month when demand hit the lockdowns and travel restrictions are expected to peak.
Each month WTI futures contracts need to be settled with physical delivery of crude oil. Normally, this happens each month without any incident or drama. However, something different happened last Monday.
Experts believe that a lack of storage capacity at the WTI contract’s delivery point set off panic among traders holding derivative contracts, who found themselves with nowhere to put the oil.
Another reason global oil demand has declined due to the impact of coronavirus pandemic. Travel restrictions, shuttered factories, and closure of borders have plunged the demand for oil.
Russia-Saudi price war
A market fear was raised between the oil-producing countries when the demand of oil plunged.
On 8 March 2020, Saudi Arabia announced unexpected price discounts of $6 to $8 per barrel to customers in Europe, Asia, and the United States. The announcement triggered a free fall in oil prices and other consequences that day, with Brent crude falling by 30 percent, the largest drop since the Gulf War.
Saudi Arabia demanded Russia to cut down its production for 1.5 million barrel, however, Russia didn’t support the production cuts proposed last week by OPEC.
As demand continued to fall dramatically, oil prices went down further, reaching a 17-year low on 18 March where Brent was priced at $24.72 a barrel and WTI at $20.48 a barrel.
How Pakistan can benefit from it?
Pakistan is in the midst of its worst economic crisis before the coronavirus attack and is finding it hard to finance its huge oil bill.
Foreign Minister of Pakistan Shah Mahmood Qureshi told a news channel on Monday evening that the latest situation vis-à-vis the oil prices would benefit Pakistan to “some extent”.
The disaster of oil prices could be in favour of Pakistan as the country’s expenditure on foreign reserves usually on oil payments.
When the prices of the oil will be decline and the current situation is suiting the prediction, Pakistan can acquire the oil at low prices which will be beneficial for the country.
Through the oil prices crash, the prices of petroleum products can be reduced and the government can give subsidies on electricity and in many other fields. Pakistan should exploit this opportunity as long as it is available.
Pakistan can reap a number of benefits if it leverages opportunity in a timely manner. Pakistan can improve its current account, increase foreign exchange reserves, lower energy prices, helping businesses and consumers, reduce RLNG rates, further cut the interest rate and set the stage for manufacturing-led growth.
