HOW & WHY THE OIL MARKETS CRASHED IN 2020

Oil consumption raised in the early 20th century with the development of the automobile industry and the reconversion of ship engines, oil prices skyrocketed when its consumption increases. Today oil is used from LPG gas in your homes to making plastic, textile, drugs, kerosene for aviation, and diesel for cars, and more.

The demand for oil has been consistent, making it one of the most stable markets in the world. But, in these fraught times of Covid-19, people are made to stay

home owing to lockdowns all around the globe because of which nobody is traveling by car or airplanes, besides that factories also are now utilising much less oil when compared to last year because of the fall in production.

India in April 2019 consumed around 5 million barrels of crude oil a day and today, we consume only 1.5 million barrels a day. Oil demand has fallen by 60-70% in almost every oil consuming nation. Oil production, however, has not decreased, and now there is too much oil for the producers to store. Coronavirus has undermined energy demand worldwide, especially in China, which was the number one importer of oil. This has been one of the key causes of this historic drop in oil prices globally.

On April 20, 2020, the price for a barrel of WTI oil fell to -$37.63 while Brent crude futures, the global oil benchmark, were last trading at $35.45 per barrel. Looking at these statistics, traders noticed that WTI oil prices were falling and entered into many contracts (contract between the buyer and seller to trade a specific amount of oil in a specific point of time in the future at a predetermined price) at a cheaper rate which is also why there was such a huge fall in oil prices in May.

To understand another important reason for the decline of oil prices, we will have to go back to 2016 when the OPEC cartel (The Organisation of Petroleum Exporting Countries) and ten other non-OPEC members, including Russia allied with an intent to make a profit. This alliance was called OPEC+.

The USA at the time had been through a revolution in its oil industry and was the number one oil producer in the world. As the oil supply increased because of the US, the price of a barrel dropped, this was injurious to other big producers like Saudi Arabia and Russia. And in 2020, Saudi Arabia in order to balance and protect oil-dependent economies decided to negotiate with Russia to collude and reduce oil production by 3 million barrels per day. Russia however, didn't team up as it believed that cutting the production of oil would only propel rival US oil producers. This decision by Russia provoked Saudi Arabia which resulted in Saudi Arabia launching a price war in March 2020, wherein it would increase its productions to 12.3 million barrels a day to increase supply thereby decreasing demand and prices, which meant it was a loss for all players.

Countries that relied on oil for their income were harmed not only by the Coronavirus but also due to the low price of oil. The war ended later after strong pressure from America fearing thousands of people losing their jobs during the pandemic. OPEC and its allies agreed to cut productions by about 10 million barrels per day in May and June. Despite this, most experts believe that the prices of oil might as well stay low for some time in these uncertain times as there are lots of people producing oil, but fewer people buying it resulting in an inverse correlation.