Prakash Kumar

Falling oil prices has no value when you can’t buy more because.

1. You have no additional capacity
2. You have no demand
3. Your existing capacity is full
4. Your currency has gone for a toss
(This is akin to the fact that while there is 1000 gallons of milk available in grocery store no matter what the price you can’t buy more than what your refrigerator can store)

Why you will continue to pay high price at pumps because:

1. You are buying oil out of your inventory bought at higher prices
2. That existing oil price will also have to factor in massive $$$$ which your supplier (govt firms or shale organizations) has lost in holding the oil futures which melted. Your oil supplier couldn’t buy more because his inventory didn’t depleted because of lack of demand.
3. Your supplier is still buying future month oil contracts @ upwards of $20/barrel and not at negative or $0/barrel- so as to ensure supply is on when normalcy returns whenever it does.
Just for indication: Jan 2021 oil futures as of yesterday was still trading at $34/barrel.

First and foremost please do not ignore that massive economic /political game is played by players with deep pockets and OPEC Countries primarily Russia and Saudi Arabia are flexing their muscles.

Under the pretext of Coronavirus pandemic, they have unleashed an economic tsunami. Their refusal to cut down supply will crowd out all the shale companies (primarily in US), which will give big players monopolistic control on oil retail once economy recover.

There will not be a single shale company present when economy will recover because they would have all evaporated in the flames of depleting oil futures.

Those who argue why Russia and Saudi Arabia are still producing oil if they cannot sell? Well that’s wrong because they are still selling big. BRENT is selling in derivative market with contracts worth upwards of $20/barrel.

Saudi Arabia drilling cost comes roughly at $8/barrel so they are still making upwards of 100% profit on sale of oil contracts at current level. Even if they sell for $10/barrel they still make profit. So they have no problem to keep drilling inspite of fact they are making far less profit. In doing so, they will kill the competition.

Against all these sell outs of contracts Saudi’s and Russia have significant storage facility available -Why? – since their primarily business is oil this is one area where everything is planned out. These Countries have strategic storage agreement with many countries in the world. They have these reserves available in several far flung countries where oil is shipped in pipelines thus with minimal logistics expenses.

Last but not the least there are players within US which includes big oil companies with deep pockets and politicians who support these companies. Together this combo wants shale companies to disappear. In return politicians get liberal donations for their election funding and do not forget this is election year in America.

Closure of shale companies supports long term strategy of big oil companies because the setback is limited while gains will stick for much longer. This strategy when looked in isolation is wrong because this defies economic logic why companies who produces oil cheaply indigenously & in process of doing so generating employment opportunities for in-house talent be taken out through brutal force. Well but in these un-real times all rule book are out off syllabus.

Unless Government arrives with a bailout package for these companies – they are pretty much done.

Imagine this – USO the primary indicator for WTI crude in US lost $1billion in market cap since last 24 hours! Yes, this is a fact, and you have to assume that whole lot of investors, people, corporate, government & HNI took that hit and no one took that hit more than those who actually brought oil at your pump.

So obviously when your supplier is taking such brutal knocks one after another – do not expect him to be selling oil for free.

This is a complicated business.

Oil you see in future market will never be same of what you should expect at your pump. It is far more complex then what catches your eye.

Just like you are supporting small family business and un-organized labor during these times- your oil provider might also need support. Think about millions of workers employed in these organizations who are staring at losing their employment any moment.

Last but not the least Countries like India buys Brent futures and not WTI. As of today there is a considerable arbitrage which exists between Brent and WTI prices. Brent is still selling @ a reasonable premium over Western Texas prices! Some more reason to have a conspiracy or two brewing against US alone when looked in isolation.

Note: Yours truly has traded in oil futures for 2 decade to understand atleast 2% of this complex eco-system which I have tried to present in simple words. Hope you can derive some logic out of it. Ignore if you don’t agree but still thanks for reading.