US Oil Prices Turn Negative For The First Time In History
US oil prices turned negative on Monday for the time in history.
 
West Texas Intermediate crude for May delivery shed more than 300 per cent to settle at -37.63 USD per barrel on the New York Mercantile Exchange.
 
What it means is that oil producers are paying the buyers to take the commodity off their stocks amid fears that storage capacity could run out in May, the BBC reported.
 
With the Covid-19 induced lockdown restricting movement across the world, demand for oil has all but dried up.
 
As a result, oil firms have resorted to renting tankers to store surplus supply, forcing the price of oil in the US to the negative zone, the BBC reported.
 
The decline comes despite the recent output cut agreement between the Organization of Petroleum Exporting Countries (OPEC) and its allies. There were hopes that agreement would stabilise oil prices, but with the Covid-19 pandemic continuing, there has been a large slip in demand that is not letting a pick-up in oil prices.
 
The current market is oversupplied on shrinking demand, creating a situation of free fall for crude.
 
The severe drop on Monday was driven in part by a technicality of the global oil market. As per the BBC report, oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs, it said.
 
The price of oil has now reached a point that it is increasingly becoming difficult for higher cost producers to remain in operation and rather look at declaring bankruptcy. A lot of US shale producers are in deep trouble and analysts expect that low oil price for few more months will result in a spate of bankruptcies in US.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    adityag

    2 months ago

    I wonder what Jim Rogers has to say about this. He famously remarked that commodity prices will never reach zero.

    REPLY

    sachinasher2004

    In Reply to adityag 2 months ago

    The price will be zero only for a few hours. June contract is trading at around $16 per barrel. The situation was created because there is no one to take delivery of oil because of the lock-down.

    India Gears up To Protect India Inc from Foreign Vultures
    In order to protect the weakened companies from international corporate raiders, given the falling prices of the COVID-19-hit India Inc, the ministry of commerce and industry issued press note no 3 dated 17 April 2020, making it mandatory for any country which shares a land border with India or where the beneficial owner of an investment into India is situated or is a citizen of any such country, to invest only via the government route
     
    Government approval will also be mandatory for a subsequent transfer of ownership, direct or indirect, in which the beneficial ownership moves from India to an entity:
     
    a. that is of a country that shares land border with India;
    b. whose beneficial owner is situated in or is a citizen of any such country.
     
    The mechanism to identify transfer of shares between two persons, both resident outside India, is difficult to be monitored. 
     
    Effective Date
    The amendment will be effective from the date of Foreign Exchange Management Act (FEMA) notification. With the implementation of the amendments made to the Finance Act, 2015 the Central government has the power to issue rules in relation to non-debt instruments. Rule 6 of FEMA (non-debt instruments) Rules, 2019 (NDI Rules) provides conditions pursuant to which a person resident outside India can invest in India. A necessary amendment to Rule 6 of NDI Rules is awaited, which could be the effective date of the amendment. 
     
    Beneficial Owner
    The press note mandates government approval even for cases where the beneficial owner of the investment is situated or is the citizen of a country sharing land border with India, even though the term ‘beneficial owner’ has not been explained. Whether the threshold for determining beneficial ownership will be the same as that provided under the know your customer (KYC) guidelines or that provided under Section 90 of Companies Act in relation to significant beneficial interest, is not clear.
     
    Restriction on FDI (& not FPI)
    Under NDI Rules, foreign direct investment (FDI) is distinct from foreign portfolio investment (FPI). A person resident outside India may hold foreign investment either as FDI or as FPI in any particular Indian company.  FDI means investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. FPI means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company.
     
    In view of aforesaid and the press note, the approval will be required in case of:
    a. any investment made in equity instruments of an unlisted company; or
    b. investment made in 10% or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company.
     
    Fully diluted basis means taking into account all the possible conversion on account of issuance of warrants, ESOPs, Convertible securities issued by the listed company from time to time.
     
    Investments other than FDI
    An entity can make investment through the foreign portfolio investment (FPI) route or even by way of indirect foreign investment. With effect from 1 April 2020, FPIs are permitted to invest up to the sectoral cap unless the shareholders have passed a resolution reducing the same before 31 March 2020. In case of FPIs, SEBI has been seeking details from the custodian of investments coming from China or via China into Indian stock markets as custodians have information of the ultimate beneficiary of an FPI.
     
    While the press note expressly restricts investments by way of FDI, given the intent, this should equally apply to downstream investments made by entities that are owned and/ or controlled by entities or persons of a country that shares a land border with India or whose beneficial owner is situated in or is a citizen of any such country.
     
    Downstream Investment
    Downstream investment results in indirect foreign investment. While the press note expressly restricts investments by way of FDI, given the intent, this should equally apply to downstream investments made by entities that are owned and/ or controlled by entities or persons of a country that shares land border with India or whose beneficial owner is situated in or is a citizen of any such country.
     
    DPIIT Statistics
    As per the fact sheet on foreign direct investment (FDI) released by the department for the promotion of industry and internal trade (DPIIT), updated to December 2019, none of the countries sharing a land border with India feature in the list of the top-10 investing countries: China (No. 18), Nepal (No. 103), Afghanistan (No. 112) and Bangladesh (No. 142). The investments routed from other countries must not have been captured above.
     
    Across the Globe
    This step to protect India Inc from predators waiting to acquire at distress valuations, is not a secluded step taken by the ministry. Several countries across the globe, viz., Spain, France, Italy, Germany, and Australia are taking a more stringent approach toward foreign investment. United States had enacted the Foreign Investment Risk Review Modernization Act in 2018.
     
    European Union (EU)
     
    • FDI screening regulation covers foreign direct investments from third countries, i.e. those investments “which establish or maintain lasting and direct links between investors from third countries including state entities, and undertakings carrying out an economic activity in a member state.”
       
    • Under the FDI screening regulation, member states may take measures to prevent a foreign investor from acquiring or taking control over a company if such acquisition or control would result in a threat to their security or public order. This includes the situation where such threats are linked to a public health emergency.
       
    • As regards investments that do not constitute FDI, i.e., portfolio investments, they may be screened by the member states in compliance with the treaty provisions on free movement of capital. Portfolio investments, which do not confer on the investor effective influence over the management and control of a company, are generally less likely than is FDI, to invite restrictions regarding security or public order. However, where they represent an acquisition of at least qualified shareholding that confers certain rights on the shareholder or connected shareholders under the national company law (e.g., 5%), they might be of relevance in terms of security or public order.
     
    Australia
    • The Foreign Investment Review Board (FIRB) revised the threshold which applies in determining whether particular foreign investments are subject to Australia’s foreign investment framework to $0. By temporarily reducing the foreign investment thresholds, the Australian government will ensure appropriate supervision over all proposed foreign investments during this time. It also issued Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020.
       
    • To ensure sufficient time to screen applications, the timeline has been extended to six months from the date of payment of the application fee.
       
    • FIRB will consider refunding the fee paid in case any applicant wishes to withdraw the application.
     
    Conclusion
    While the intent is to align with the global initiative and protect the companies from hostile takeover by predators trying to encash on low valuations, there is a need to plug the gap by taking into account investments by FPI and downstream investment by entities ultimately  owned and/or controlled by an entity situated in or by a citizen of a country sharing a land border with India.
     
    (The writer is senior partner with Vinod Kothari & Company)
  • Like this story? Get our top stories by email.

    User 

    COMMENTS

    doctordhanbpathi

    2 months ago

    https://www.moneylife.in/article/india-gears-up-to-protect-india-inc-from-foreign-vultures/60082.html
    1. When Commerce Ministry’s missives are relevant in tune with certain coronavirus affected nations, prudent for PMO & UFM to fine-tune with Commerce Ministry & issue amendments. The PMO is expected to take the initiative.
    2. The PMO must have another NDRF like well-nurtured team, with RBI/UFM/IBA/UHM & PROTECT INDIAN ECONOMY AGAINST COVID-2019 PANDEMIC IMPOSED BY WUHAN PROVINCE, CHINA.
    3. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    4. SATYAMAEVA JAYATHE!!!

    Ramesh Popat

    2 months ago

    china has reacted on this and will take up it with WTO!

    shetyerb

    2 months ago

    I am very happy about this decision by our Government. We should stick to it irrespective of what WTO or other international financial bodies.

    i_sakarwala

    2 months ago

    I wonder what would be the counter reaction. The FDI investment and it's set of rules have not be flouted and changing it and retrospectively making amendments does not bid well for any investment friendly business atmosphere. China should be taken into confidence and be made our favoured business partner as the U. S. But we cannot have both the countries patronage. As U. S and China enjoy an uneasy calm. We have to decide and decide fast on whose side we want to be. Being neighbours I think my bet would be on the Dragon.

    Oil prices fall further, WTI hits $ 15/barrel on low demand
    Crude oil prices plunged on Monday with the West Texas intermediate (WTI) crude in the US falling below the $15 per barrel mark, the lowest level in 21 years.
     
    The fall in oil prices comes on the back of weak demand amid the coronavirus crisis. The pandemic has almost brought the global travel industry to a halt, limiting demand for the commodity which has fallen by almost a third this year. Further, concerns regarding storage have also weighed on the markets as global storage is nearly full.
     
    Currently, WTI crude is trading at $14.78 per barrel, lower by 19.5 per cent from its previous close.
     
    Brent crude was at $27.66, lower by 1.5 per cent from the previous close.
     
    The decline comes despite the recent output cut agreement between the Organization of Petroleum Exporting Countries (OPEC) and its allies. There were hopes that agreement would stabilise oil prices, but with Covid-19 pandemic continuing, there has been a large slip in demand that is not letting a pick up in oil prices.
     
    The current market is oversupplied on shrinking demand creating a situation of free fall for crude.
     
    Soon after the OPEC-Russia talks on production cut failed earlier last month, crude had fallen by more than 25 per cent, the largest fall since the 1991 Gulf War, to $34 per barrel on March 9.
     
    The price of oil has now reached a point that it is increasingly becoming difficult for higher cost producers to remain in operation and rather look at declaring bankruptcy. A lot of US shale producers are in deep trouble and analysts expect that low oil price for few more months will result in a spate of bankruptcies in US.
     
    With world demand now forecast to plunge by over 20 million barrels per day, a 30 per cent drop from last year, analysts say massive production cuts will be needed beyond just what has been agreed between the Organization of the Petroleum Exporting Countries (OPEC), Russia and other producers.
     
    Global markets have been on a bear run including the financial markets for the past few weeks owing to the concerns of a significant impairing of the world economy due to the coronavirus crisis.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • User 

    COMMENTS

    Ramesh Popat

    2 months ago

    our imports are at brent or nymex price or combo?! (to know india's benfit)

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)