For the first time in history on 20th April 2020, the crude oil price fell below zero dollars reaching negative numbers. What do negative numbers mean? It implies that producers need to pay to rid of oil. The obvious reason for this drop is that the world has come to halt due to the COVID-19 outbreak and that means fewer people on road. This created imbalance by increasing supply more than demand. Countries that produce crude oil are running out of reservoirs to store produced crude oil and they need to find a way to sell the oil.
To analyze the situation better lets us understand how oil price is controlled. It is controlled by the US, OPEC (the Eastern cartel), and Russia. Their job is to make sure that prices all over the world remain stable. The future sellers estimate demand and sell to contracted buyers at the contracted prices. When the oil price dropped in April due to unpredicted pandemic, countries which import oil needed to buy to contracted price even though crude oil dropped to negative.
What does all this mean to India? India imports more than 80% of its crude oil and to avoid losses one can obviously guess is to reduce imports. This situation is advantageous to India mainly because India has the capacity to hold up to 39 billion barrels of oil to fill up at a low price. It seems like the situation is favoring the drop in petrol and diesel prices for consumers, but chaos has been observed in the country with a rise in price. Why is this happening?
Currency Exchange Impact
We all know international trading happens in dollars and rupee is not doing well as it dropped by 3.6% this year. This mismatch implies more rupee needs to be spent for the same amount of crude oil than you did a year ago. This reduces those extra brownie points we got from the decrease of crude oil.
Petrol and diesel are needs to be extracted from crude oil with a refinement process. There are refinement costs involved based on the complexity of the process. Diesel is easier to refine so it is usually cheaper compared to petrol
Indian government has chosen not to pass this benefit to consumers as it is already running out of funds with the economy slowing down. Instead, it has decided to raise taxes to get some funds to tackle the COVID-19 situation.
Damage control by Oil Marketing Companies(OMC)
In the past, when fuel prices increased the government asked OMCs to take losses so that fuel prices are stabilized. The current situation is an opportunity for OMCs to store up the margins by keeping some margins to themselves.
Diesel is being sold at a higher price than petrol and yeah it is happening for quite some time now. I know I am contradicting my statement which I made a few sentences earlier by telling petrol involves complex refining process. This variation is due to the tax structure that is reducing the price difference between petrol and diesel.
One thing that needs to strike when you see that there is a drop in oil prices means the past 15 days the price has been low as calculations are being made based on 15 days data!