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Why did crude oil prices fall below 0? How it will impact Indian Economy?

Mayank Mohanka , Last updated: 26 April 2020  

New York Mercantile Exchange (NYMEX), USA

20.4.2020, Trade Closing Hours

West Texas Intermediate (WTI) Crude Oil May Future Contract

Trading at Minus (-)$37 per barrel.

By the time, when most of us woke up on the morning of Tuesday, 21.4.2020, crude oil prices had fallen to below zero levels, for the first time in history.

To be more specific, the WTI crude oil closing price was announced at a negative -$37.64 a barrel, at the trade closing hours on NYMEX on 20.4.2020.

A negative price suggests, instead of buyers paying the sellers, sellers were paying buyers, $37 per barrel of crude oil, along with the crude oil.

So, what led to such an unprecedented and unthinkable situation?

Let us understand it from the eyes of an investor in NYMEX first….

Impact of drastic fall in crude oil prices on Indian Economy

December 20, 2019

An investor expecting a future rally, entered into a May Crude Oil WTI Futures contract in NYMEX at a price of $40 per barrel, with a settlement expiry date of 20.4.2020.

March 8, 2020

News channels started reporting how talks between OPEC (read Saudi Arabia) and Russia have finally collapsed, possibly precipitating a price war that could push oil down to as much as $20 a barrel.

March 11, 2020

The World Health Organisation (WHO), declared COVID-19 a pandemic and majority of the countries, worldwide, were compelled to announce lock-downs, to maintain social distancing to control the further spread of the novel coronavirus. Consequently, the demand for petrol, diesel, crude oil, has fallen and plummeted to an all-time low.

April 20, 2020: The Settlement Expiry Date

Nobody wanted oil right now. The producers (who dig the oil) didn’t want it. The refiners won’t touch it. And the consumers have no need for it.

The WTI Crude Oil needs to be delivered physically at Cushing, Oklahoma (US). The storage constraints at Cushing, Okhalama, led to the dumping and unwinding of May contracts with other market participants moving to June contracts.

At the close of trading hours, the Crude OIL WTI future price breached the $0 level.

Prices further breach -$8……. And further -$15……. further further -$30 and finally closed at -$37.


The "future" has now converged to the present.

So, the WTI Crude Oil at NYMEX, reached historic low levels plummeting to negative levels for the very first time on future contracts with May delivery. As the contracts were expiring on 20.4.2020 and traders with long positions facing the prospect of taking actual delivery of crude when no storage was available, were actually willing to pay to dispose off the crude oil at whatever cost even at -$37 per barrel.

Here Back in India…

Multi Commodity Exchange, India

MCX crude oil contract is based on NYMEX WTI crude oil contract.

MCX as an exchange currently doesn’t have a zero or negative pricing system on its trading platform and the trade closing time is 5 pm.

At the trade closing time (at 5 pm) in MCX, the NYMEX WTI crude oil was hovering nearly around $9 a barrel and which meant the MCX crude oil closing price at Rs 995 per barrel. Traders on MCX couldn’t square off their positions as the exchange had already closed. In the meanwhile, the NYMEX WTI Crude Oil (USA) started falling drastically and turned negative within hours and closed at -$37 per barrel.

However, since, the NYMEX WTI crude oil closing price was announced at a negative -$37.64 a barrel, MCX also fixed that as settlement price on its platform, during the late hours of 20.4.2020 and thereby compelling the trading members to shell out Rs. 2.88 lakh more for every 100 barrels of crude oil.

Thus, the trading members at MCX who were considering the Rs +995 per barrel ($9 per barrel) , as the final price for settlement or rollover of there positions, at the trade closing hours at 5 p.m. on 20.4.2020, were suddenly and abruptly asked to pay Rs.(-) 4090/- per barrel (-$37.64 a barrel), by MCX, after the trade closing hours on 20.4.2020.

This move of the MCX has compelled its big trading players like Motilal Oswal, Religare Broking and Kunwarji Commodities to file writ petitions in their jurisdictional High Courts, challenging the settlement of crude oil positions in negative figures by MCX, after the trade closing hours and the outcome of such writs is still awaited.

Impact of the Drastic Fall in Crude Oil Prices on Indian Economy  

a. Fuel Prices

Well, all of us are hoping that as the futures contracts in crude oil are trading at negative figures currently, and with drastic fall in the demand for petrol and diesel during the ongoing lock-down period, the prices for petrol and diesel would also fall drastically and we may be able to fill in our cars’ tanks with diesel and petrol free of cost. A $1 drop in crude oil price should normally lead to a drop of 50 paise in retail prices.

However, it will not happen as the Centre and State Governments are in dire need of finances and funds amidst this COVID-19 outbreak, with their commitments to provide free cooking gas refills to about 83 million people till the end of June and the relief package of about 1.70 lakh crores.

b. Disinvestment

The Government was expecting generation of substantial finances from the disinvestment of the State-owned Bharat Petroleum Corp Ltd (BPCL), this financial year, but now after this drastic collapse in the demand for petrol and diesel amid this corona outbreak and the WTI crude oil fiasco, this big-ticket disinvestment is almost off the table, for now.

c. Oil Industry

The Oil Industry in India may face a similar situation which led to the collapse of WTI crude oil, with refiners flooding the market with petroleum products that has not enough takers in the absence of demand in the present lockdown and storage facilities reaching their capacity.

With large portion of Indian Oil Market dominated by government owned companies, such speculative trading is not possible here, but situation on the ground has lots of similarities.

The State-run oil marketing companies are left with no option but to cut production  with refinery run almost dipping by 50 per cent now, with demand for petroleum products, primarily petrol and diesel, shrinking by almost 60 per cent in the first half of April on COVID-19 related lockdown and projections that overall product demand will be over 30 per cent lower in the first quarter of FY 2020-21.


To add to the problem is almost full storage capacity at fuel stations and at sites created by refiners. Analysts estimate that almost entire 85 million barrel storage capacity with the state-run companies is full. This means that if the production continues at normal pace, products would either have to be disposed off to whosoever wants it at whatever prices or stored at floating or leased storage abroad at high cost.

Even private refiners such as Reliance Industries, as per analyst reports, is looking to send product cargoes to leased storage outside India.

At the fuel pump level, out of 66,000 stations in the country, most are not reordering petrol and diesel and there storage are also reporting full, the situation is grim is metros like Mumbai, Delhi, Kolkata where lockdown and increasing number of coronavirus has completely stopped public transportation and resultant a sharp fall in demand for fuel.

Concluding Remarks

Summing up with just One Line.

Yes, the barrel has become costlier than the crude oil in it.

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Published by

Mayank Mohanka
(Chartered Accountant)
Category Corporate Law   Report



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