Negative crude oil prices | Reasons and Future

What does this mean for India?

Falling crude prices are typically good for India. For every $ of crude price reduction, under normal demand, the government of India makes about 50K Crores (provided they do not pass on the price cut to the consumers). However, given that the demand is so low everywhere, the best India can do is to buy and store oil. The current storage capacity in India is about 67 days worth of Oil that is required by the country and there are articles that indicate that India is striving to increase the storage to 87 days Although falling crude prices are usually good for us, beyond a certain point we no longer can take advantage of cheap oil.

If the crude price remains low for a long period, then it is definitely a big positive for India.

Impact on Indian Stock Market

Companies that produce oil in different forms will take a huge hit (examples: ONGC, IOCL, OIL, etc). This is because the cost of manufacturing for these companies is very high. Refineries sector will also face some headwinds in the short term (example: Reliance, Bharat Petroleum, HPCL, etc). But as they phase out their inventory, the losses will subside. The  Companies that consume or require crude to manufacture their products will benefit. Examples of such sectors are Paints (Asian Paints, Berger, etc), Adhesives (Pidilite), Airlines (Indigo, SpiceJet), Plastics (Finolex, Nilkamal), Tyres (Balkrishna Tyres, MRF, JK Tyre). One Important thing to note here is that Airlines might not get the full benefit of falling crude prices as there are hardly any operations underway currently. 

But make sure you complete your analysis and then only take decision to buy stocks in these sectors. You can read about our investment philosophy here.

Complaints against MCX by Indian Brokers

Most of the commodity trading in India happens in the MCX exchange. Due to the lockdown, the exchanges reduced trading timings from 11:30 PM to 5 PM in the evening. What this means is that the customers and brokerage firms were exposed to the risk of not being able to react in cases of sharp move in commodity prices. April crude on MCX was at around 1436 per barrel on April 17th, Friday closing (one lot of crude is 100 barrels and this translates to 1,43,600 per barrel). The contract prices started falling on the Monday morning itself and when the MCX exchanges were closed at 5PM, the contract value had fallen to 96,500 per lot. However worldover the crude contracts were still falling while MCX remained closed and finally crude closed at $-37. That would mean Indian Crude oil April contracts that were not closed prior to 5PM would open at  Rs -2,880 per Barrel. 

Since these future contracts do not require the customers to deposit the full cost of the contract and they require only a certain percentage of the actual value of the contract to purchase it (about 57% now). So between 5 PM on April 20th and the next day, because the markets were closed and Crude fell below the “margin calls”, the onus is on the brokerage firms to pay the MCX. According to some reports, there were 11,100 contracts open at 5 pm yesterday on MCX, which means a potential loss of over Rs 330 crores for the Commodity brokerage firms over and above the margins placed by customers. Because of this chaos, some brokerage firms (such as Motilal) have lodged a complaint against the MCX.

I have uploaded video on crude, you can watch it here.

What was your experience during this episode of crude ? Let me know in comment below.

Regards,

Shashank