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RUDDERLESS WORLD ECONOMY DRIFTING IN CHOPPY SEA WITHOUT A COMPASS– MAYHEM IN OIL MARKET

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April 21, 2020

1. Even as crude prices plunged to their 22 year lows, the U.S.crude prices FALLS BELOW ZERO before settling at MINUS
$37.63 a barrel !

1.1. In March 2020 alone Brent Crude prices tumbled by 50% to $26 a barrel ,before settling at $33.

2. Demand destruction compel traders to flee in a frenzy from the May expiring FUTURES Contracts.

3. With the US oil storage hub at Oklahoma set to get filled soon, NO TRADER WAS WILLING TO TAKE PHYSICAL DELIVERY in respect of the existing Futures Contracts, because there is NO PLACE TO STORE THE OIL.

4. THE SCALE OF DEMAND DESTRUCTION

4.1. The world consumes 100 million barrels of crude oil a day on an average.
4.2. With the world economy in Lockdown mode and billions staying put at home because of the China driven COVID-19 CALAMITY, the demand for oil is down by 30% as of now.

4.2.1. This works out to 30 million barrels a day.

4.3. Now ,the Trump mediated production cuts (to end the price war between Saudi Arabia and Russia ) by OPEC+( plus stands for Russia) earlier this month by 9.7 mbd works out to be too little to prevent the glut.

5. US OIL PRODUCERS GO BANKRUPT

5.1. America extracts oil from rocks through a process called ” FRACKING”.
5.2. The cost of this extraction is much higher than pumping oil from earth’s belly, which is what the OPEC countries and Russia are all doing.
5.3. So, if the crude prices drops below $50 a barrel, the US producers make loss.
5.4. In January 2020, the Haynes and Boone’s Oil Patch Bankruptcy Monitor Report said that, since 2015, 208 North American producers have filed bankruptcy proceedings for an aggregate debt of $121.7 bn.

6. FUTURES EXPLAINED

6.1. Used as a HEDGE against adverse price movements, a Futures Contract is an Agreement to buy or sell the underlying asset ( in this case, the crude oil) at a predetermined price at a specified time in the future.
6.2. The contracts are negotiated at ‘ Futures Exchanges’ ( most stock exchanges have their ‘ futures division also), which act as the market place between the buyers and the sellers.
6.3. The buyer of a futures contract is said to hold a
‘ LONG’ position and the seller of a futures contract is said to hold a ‘ SHORT’position.
6.4 The contracts usually involve depositing a margin money with the exchange ( which may vary between 2 to even 20%) depending on the price volatility, by both the parties, to cover the risk of either party walking away from the contract if the price moves against them.
6.5. On the specified ‘ delivery’ date, the contract is settled ,–

6.5.1.by the buyer taking physical delivery of the commodity , or
6.5.2. by cancellation by buying another futures contract, or
6.5.3. through ‘ cash settlement’ by which the loss/ gain is paid off at the expiry of the contract.

6.6. IN PRACTICE, VERY FEW OIL FUTURES CONTRACTS ARE CONSUMMATED BY PHYSICAL DELIVERY.

7. WHY THE MODI GOVT IS NOT PLAYING ITS PART IN PASSING ON THE BENEFIT OF FALLING OIL PRICES TO THE CONSUMER?

7.1. This issue is a golden chance for POLITICAL PARASITES & INTERNAL ENEMIES OF THE NATION TO KEEP MISLEADING THE PEOPLE.
7.2. I have explained in detail as to why the Centre CANNOT do this on a number of occassions in the past five years whenever these forces have indulged in nation hurting propaganda, aided by a hugely compromised section of the press and the media.
7.3. You will be surprised to know that the States unfortunately ruled by these parties have only INCREASED THE STATE VAT RATES EACH TIME THE OIL PRICES FELL!

Ramdas Iyer
21.04.2020
Independent Analyst

Reference Link : https://www.hindustantimes.com/business-news/oil-plunges-below-5-with-traders-fleeing-expiring-contract/story-q4GteT8T7czalop0lojTdI.html

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