By Sameer Patil
"La stupefaction" or Astonishment, screamed headlines across the globe, when oil prices fell so much below Zero, that buyers were paid to buy oil. The world was amazed and bewildered in equal measure at the eye-popping slide in oil prices, as coronavirus pandemic decimates the world economy. Obviously, we now know that it was a particular grade of oil i.e. WTI crude prices which dropped to $40/bbl at the New York Mercantile Exchange (NYMEX) and was strictly a problem limited to the US.
On the contrary, two-thirds of all oil traded globally and close to 90 per cent of Indian crude imports are benchmarked to Brent crude, the prices of which remained in positive territory.
Difference between WTI and Brent
When it comes to crude oil, there are different grades. The most popular traded grades are Brent North Sea Crude and West Texas Intermediate (WTI). WTI is usually extracted from US oil fields in Texas, Louisiana and North Dakota, and delivered in Oklahoma, while Brent crude is extracted from the North Sea, and delivery locations vary by country. Both of them have lower Sulphur content, considered "sweet", and relatively light in density. Cost of shipping for Brent crude is lower, since it is produced near the sea and can be delivered anywhere, while of WTI is higher since it is produced in landlocked areas with limited storage facilities. Brent is the benchmark price used by Europe and the Organization of Petroleum Exporting Countries (OPEC), while WTI crude price are a benchmark for US oil prices. Most of the oil produced in Europe, Africa and the Middle East is priced according to the cost of Brent crude.
Essentially, Brent is the reference for about two-thirds of the oil traded globally. Since India imports primarily from OPEC countries, Brent is the right benchmark for oil prices in India.
What happened on 20 April 2020
WTI crude oil futures traded in the negative territory for the first time in history, as low demand because of the COVID-19 pandemic led to a supply glut. With limited storage space available, the US was running out of space to store the oil produced, and buyers desperate for storage space.
"BSE is the first Indian exchange to accept orders and execute trades at negative prices."
Such was the need to sell the contracts, that on April 20, WTI May futures contract traded 306 percent lower to settle at $37.63 a barrel, after going as low as $40.32. But, the cost of Brent crude, the international benchmark, was higher since more storage space is available across multiple locations, making deliveries easier. On April 20, Brent futures settled at $25.57/ bbl. Brent futures are primarily traded on the Intercontinental Exchange (ICE) in London, and WTI is the underlying asset for oil futures on the New York Mercantile Exchange (NYMEX). One big difference is that WTI contracts are settled physically at NYMEX, while Brent crude contracts are settled in cash.
However, participants trading in WTI contracts in India have no other option but to settle in cash. CME Group Chairman and CEO Terry Duffy (1) emphasized that the exchange does not try to attract retail investors who may not know the rules, and the oil contracts worked "to perfection". He said "The small retail investors are somebody that we do not target. We go for professional participants in our marketplace."
Why Brent is Right for India
The Indian basket of Crude Oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of crude oil processed in Indian refineries in the ratio of 75.50:24.50. Out of India's total crude supply, 80% is from OPEC countries (with Brent crude as Benchmark) as compared to 9 per cent from North America's WTI (2). Brent crude has a 98 per cent co-relation with the Indian crude oil basket, as compared to 88 percent for WTI in 2019. The significant share and high co-relation of Brent crude in the Indian crude oil basket makes Brent a preferred benchmark for hedgers in India. Brent is also linked to seaborne crude with fewer storage limitations than WTI, which is settled physically in a landlocked storage site in Oklahoma. Also, international contracts, especially Nymex WTI crude are non-comparable contracts for Indian settlement reference rates because there is no option to give or take physical delivery. Without a doubt, Brent crude today is the right indicator of global and Indian oil hedgers, traders and participants.
Trading Brent Crude Futures in India
BSE, India's leading exchange group and the world's fastest Stock Exchange with a speed of 6 microseconds has launched Rupee-denominated Brent futures contract settled on Intercontinental Exchange (ICE) Europe Brent prices. Brent crude prices at BSE are derived from ICE Europe, the world's leading energy marketplace. This enables the price discovery of Brent crude prices in the Indian time zone based on domestic fundamentals. Oil producers, refiners, hedgers, users and investors in India can benefit from access to globally aligned prices and trading practices in Brent crude. Additionally, BSE has also enabled its BOLT Plus trading system to accept orders and execute trades at negative prices, making it the first exchange in India offer this facility. The BSE Brent crude contracts are designed to not only protect stakeholders from oil market uncertainties but also help bring additional transparency, efficiencies and cost-effective hedging tools to participants in India.
(Sameer Patil is Chief Business Officer, BSE. The views expressed are personal.)
Source: IANS
About Gopi
Gopi Adusumilli is a Programmer. He is the editor of SocialNews.XYZ and President of AGK Fire Inc.
He enjoys designing websites, developing mobile applications and publishing news articles on current events from various authenticated news sources.
When it comes to writing he likes to write about current world politics and Indian Movies. His future plans include developing SocialNews.XYZ into a News website that has no bias or judgment towards any.
He can be reached at gopi@socialnews.xyz