Tuesday, 14 July 2020
Home Business Economy What will a barrel of oil at US$-37.63 mean for Costa Rica?

What will a barrel of oil at US$-37.63 mean for Costa Rica?

Analysts explain what happened this Monday in the oil markets, which left the WTI- benchmark for the country – at a negative price, on what is bieng called the worst day in the history of crude oil and what it will mean for Costa Rica.

Panic seized the oil markets on Monday. The West Texas Intermediate (WTI) crude, the benchmark for Costa Rica, closed at US$-37.63 dollars for delivery in May, a negative price record without precedent in this market, hit by the excessive supply of crude oil in the world as a consequence of the collapse of the demand.

Behind this historical behavior of the price of oil is the lack of certainty about when the pandemic will end and the ravages that the health crisis is causing in the world economy, which has semi-paralyzed the main economic activities in the world and therefore boiled oil consumption. and its derivatives.

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Industries are requiring less oil to burn and air and sea markets are paralyzed, following the decision of most countries to block their air, land and sea borders to fight the spread of the virus, leaving millions of planes grounded and ships, weighing down the oil market.

In addition, compulsory quarantines in several countries of the world and a call to stay at home by most others, has left millions of vehicles parked and industries of all kinds have slowed down or even stopped.

The situation has worsened because the storage capacity of crude oil in the United States and the rest of the world is about to reach its limit, which caused the holders of oil contracts with maturity today (April 21), on Monday to search desperately how to get rid of their acquisitions, even paying other buyers to take the barrels of crude.

If they could find buyers for their contracts, they would have to physically receive the barrels and find where to store the product, something that is almost impossible due to the storage situation in the world.

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Hence, the price of crude oil on Monday went from US$18.27 a barrel last Friday to US$-37.67 at the end of the day on the US stock markets on Monday, which meant a collapse of US$55.94 a barrel, more than 300% in the day.

And although it is expected that, today,  Tuesday the future prices of a barrel of oil will recover, because that is when the contracts corresponding to June begin to be negotiated, analysts explain that what happened this Monday is a difficult and uncertain omen that awaits the world economy in the coming months.

“The most valuable thing is the storage space, whoever has the storage space takes that oil (they are looking for how to sell the oil and contract holders that expire in May) and they still pay you to take it. This is cheaper than having it stored somewhere or on a ship,” explain experts.

Suppliers operate in the oil market, those who purchase futures contracts for crude oil (without receiving them physically in barrels) to trade and obtain financial returns, and those who actually buy the raw material to process it, among others.

In the WTI market, according to Insidefutures.com, a site specialized in futures contracts for raw materials, one contract is equivalent to 1,000 barrels of crude oil, which is what the holders of contracts of this type should receive as a minimum if they do not manage to get rid of their inventories acquired for May this Monday, which expires today, Tuesday.

The increase in the sales volume of these contracts caused an unprecedented market crash, although the contracts for June were already trading at more than US$20. What happened this Monday is a fact not seen since the creation of the future oil market in 1983.

The impact on Costa Rica

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So what will it mean for Costa Rica that the price of oil has fallen into negative territory? What should consumers expect? What consequence will it have for the Costa Rica economy? What should the government do?

More: Price of Oil Dropped Below US$0 on Monday, But Don’t Worry Fuel Prices In Cosa Rica Will Continue High

Specialists warn that what is being seen right now (in the international crude oil markets) is more of what is coming in the future for Costa Rica, not so much on the oil side, but on the side of economic growth. That it is happening and that has never happened is simply a reflection of how the demand for oil in the world is diminishing and it is diminishing precisely because of the global recession that almost all the countries of the world are entering and therefore it is showing us where the world is going in economic terms and where we are going to go as well, that is, we are heading towards the deepening of the recession.

The indication is that although a depressed crude oil price benefits Costa Rica, as a net importer, because it lowers the oil import bill, this will be a partial benefit, because the damage that is coming from the global recession will be much greater than any benefit that can be obtained from the reduction of the price of oil.

In more enlightened terms, a global economy in a deep recession implies less movement of remittances, less demand and prices of export products, fewer possibilities of attracting foreign investment, the damages of which cannot be entirely offset by a less expensive oil bill for Costa Rica for a depressed international price of crude oil, which is apparently positive for the country for the short term.

But also the fall in the price of crude oil, the most commercialized raw material in the world, also reflects the downward movement of other products in demand in international markets, some of which are exported from Costa Rica.

Population will not benefit

Although the forecasts are for oil prices are that will continue down in the coming months, as storage sites are expected to reach their limit in the middle of this year, it is doubtful that this benefit will be fully transferred to the pocketbooks of Costa Ricans.

Based on the past, looking forward, as oil prices in international markets decrease, in Costa Rica fuel prices will remain high, at least higher than what they should be if it were not for the lousy institutional management of the Refinadora Costarricense de Petroleo (RECOPE).

Guaranteeing that the market mechanisms operate in the domestic markets for the benefit of the population, is not a mandate that the state agency understands, letting fuel prices at the pumps fall as they should be.

More: The Costa Rican model for fuel prices to the consumer

Business sector should demand

But what most interesting, and not in a good way, is that the business sector is not pressing the government to reduce prices, as the rules of the market economy mandate.

This should be a great time to take advantage of almost “free” oil to bring relief to many small and medium-sized companies that, due to high production costs and falling sales, have been forced to lay off personnel to face the effects of the pandemic.

If fuel prices fell according to the fall in international prices consumer prices would be cheaper.

The government should prioritize lowering fuel prices.

 

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Q Costa Rica
Q Costa Rica
Reports by QCR staff

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