THE GAME OF CRUDE OIL

Oil plunges below $0 for the first time in history impact of COVID'19 CRISIS (-40$ per barrel). The news came in the market on 20th April 2020. 

India itself had spent around $112 billion in the year 2019-2020 for the import of crude oil. Our dependence on crude oil is certainly more since our nation is a developing country and the need for crude oil for the operation of various industries is quite high in comparison to other nations. (Times of India)

So does that mean petrol/Diesel will be available for free?

The first and foremost thing to understand regarding crude oil is that it is important for our economy. The next thing to consider is the impact on the price of crude oil. The COVID'19 PANDEMIC lockdown had affected the demand for oil adversely.

• The demand for aviation fuel to run jets and aircraft fell down by 98% in just 2 months

• Fuel demand for commercial transportation had dropped by 50% in the 1st half of April itself

• Demand for Diesel consumption in the manufacturing industry had fallen down by 80%.

India itself is one of the major crude oil importing countries like Japan, China, etc.

The major exporters of crude oil are:- (source:-worldstopexport.com)

Countries	Overall percentage
Saudi Arabia	16.1%
Russia	11.4%
Iraq	8.1%
Canada	5.9%
Kuwait	4.6%
Iran	4.5%
U.S.A	4.3%
Nigeria	3.8%
Kazakhstan	3.3%

There are also other nations who are oil producers and exporters but their overall contribution is very low in comparison to top leading crude oil exporters.

But the major big players in the crude oil industry were said to be on a price war as on 13th April 2020. The 3 countries which were at price war are as follows:-

U.S.A

Russia

Saudi Arabia (OPEC nations)

The price war was basically based on eliminating the competitors by selling crude oil at the lowest possible price, by extracting more and more crude oil and lowering their extraction cost so that they can maintain a Monopoly oversupply of crude oil in the world. Over the years U.S.A was the major oil importer country until the year 2014. When U.S.A had developed a new technology/revolution named as “SHALE ENERGY REVOLUTION” which is basically extraction of oil from land beds by using the technique of shale energy efficient and less expensive.(source:-sroll.in)

With one of the consumer turning into a competition (U.S.A), Saudi Arabia along with other countries maintained a monopoly board called OPEC (ORGANISATION FOR PETROLEUM EXPORTING COUNTRIES).

OPEC, Consists of 13 other countries such as:-

Iran

Iraq

Kuwait

Nigeria

U.A.E

Libya

Saudi Arabia

Venezuela

Etc.

The board is basically made to control the pricing of crude oil in international markets by putting restrictions on the supply/extraction of crude oil.

To overcome its newest competitor(U.S.A) OPEC in December 2016 had joined hands with few other existing crude oil extracting nations and formed OPEC+ which consists of countries such as Russia, Mexico, etc. A total of 11 such countries had joined hands with “OPEC+” giving total control of 55% of oil supply in the world under one organization (OPEC+). Now OPEC+ has a total of 24 countries whose basic aim was to control the supply of crude oil in the international market so that the demand for crude oil is always high and they all can earn a possible and respectful profit.

With the spread of Pandemic in the whole world, the demand for crude oil fell down as discussed earlier so the only way to stop the price of crude oil from falling was by basically controlling the supply side of the chain by creating a false scarcity for crude oil and lower down their extraction capacity.

Basic fundamentals:-

Higher demand leads to an increase in price with low supply.

Low demand leads to a fall in price high supply.

So seeing the overall condition of the international market OPEC+ had its meeting on 5th March 2020 to reduce overall oil production/extraction by 1.5 million barrels per day and to control the falling price of crude oil due to a decrease in oil demand. But in the said meeting Russia opposed the decision since their competitor U.S.A would have not lowered their production capacity and would sell crude oil at much lower rate. As a result of this, Russia made a swift exit from the OPEC+ with such a condition that neither Russia nor U.S.A lowered their production capacity to extract crude oil which later impacted as a fall in the price of crude oil.

With such a situation it turned out to be an opportunity for importing countries such as India, China, Japan, etc. With fall in the price of crude oil various importing countries have started to stock and store crude oil during the pandemic for later benefits for example:- 

In the year 2018, India had spent approximately $112 billion on crude oil, this year India would have to spend around $64 billion for the same amount of crude oil required last year.

There is term as FUTURE OPTIONS/CONTRACT:- As per which due to the volatility of price in crude oil buyers make an advance order for a specific price for a specific date of delivery and then they buy crude oil at that specific price. (source:-terminology.com)

So this future contract option is basically various investors trading in commodity market trade upon just to know common investors/ individual investors can also trade in commodities since it’s a part of the stock market. (source:-Money control. Com)

As per previous records, the speculation made for the month of May 2020 was expected to fall due to various factors mentioned above but there is likely a chance for future contracts made for the month of June 2020 to give exponential results.

Since the investor who bought the future contract of crude oil in the month of May for upcoming months would have bought at a price which is already trading very low and can make potential profit/gain from trading in future option and for the investor who had already bought future contract on crude oil, they had to face an unexpected loss.

The stock market is not only based on shares / Equity market, but there are also various other aspects such as future contracts even in commodity and shares, direct trading in the commodity market, and many more in which one can invest and earn potential profit/gain.