Negative crude oil price leads to multiple legal battles
In late April 2020. for the first time in history crude oil prices dropped below zero. To avoid storage cost sellers are paying buyers to take the consignments as oil demand has crashed globally.
This was the historic crash in prices of crude oil in US. Due to this. the oil contracts of April which are executed by the Multi-Commodity Exchange of India Ltd (MCX) are settling at negative ₹2,887 per barrel. This gave rise to multiple court cases in India.
Legal battles in India due to negative crude oil price:
Altogether, there are 5 cases floating across 3 jurisdictions in India. There are 3 cases in Bombay High Court and the rest two are from Rajasthan High Court and Delhi High Court.
The first lawsuit:
The first case is filed by PCS Securities Ltd, Motilal Oswal Financial Services Ltd, and Religare Securities. On 22nd April 2020, they jointly filed a lawsuit in Bombay high court against Multi-Commodity Exchange of India Ltd (MCX) and Securities and Exchange Board of India (SEBI). They appealed to the Bombay high court that, do the commodity exchanges in India including Multi-Commodity Exchange of India Ltd (MCX) have any provision to execute the trade of commodities in negative value? They further added, negative values cannot calculate any risk and margins for future contract using any software.
The Second lawsuit:
The second case is again filed by Motilal Oswal Financial Services Ltd on Dhanera Diamonds. Dhanera Diamonds is the trading client of Motilal Oswal Financial Services Ltd. This case was filed in Bombay High Court in which Motilal Oswal Financial Services Ltd appealed in court to secure the dues from Dhanera Diamonds. The dues amount to ₹80.74 crore. The outstanding dues was on its settlement obligations for trades in crude oil contracts from Dhanera Diamonds.
The Third lawsuit:
In retaliation, Dhanera Diamonds filed a case against Motilal Oswal Financial Services Ltd and Multi-Commodity Exchange of India Ltd (MCX) demanding ₹56 crore due. They appealed that commodity exchanges in India including Multi-Commodity Exchange of India Ltd (MCX) do not have any provision to execute the trade of commodities in negative value, so there is big question how these contracts are settled?
The Fourth lawsuit:
Ganganagar Commodity Limited filed a case against Multi-Commodity Exchange of India Ltd (MCX) in Rajasthan High Court. Ganganagar Commodity Limited laid the same allegation on Multi-Commodity Exchange of India Ltd (MCX) that how negative trading is executed when they do not have any facility to allow negative trading. The fifth lawsuit was filed at Delhi High Court which is similar to fourth lawsuit.
New laws can be implemented:
All these court cases are pending. When all these court cases close, this will not only settle the obligation but also set new supersede on contract law. The big question revolves around contract law is whether exceptions should be made to established norms and regulation for unexpected situations.
Effect of fall in crude oil price on Indian economy:
Even in the midst of chaos, falling crude oil prices can reduce India’s economic pain. India went under lock down due to COVID-19. This resulted in gradual slowdown of Indian economy, but on the contrary helped the government to accomplish their various annual target. India can raise oil-related taxes due to negative crude oil prices, which can help to offset other losses. The sudden fall in crude oil prices may help India to control inflation and boost tax revenues. Decrease in oil price can be beneficial for India as money paid will be less to buy oil from abroad as approximately 80% of crude oil requirements are imported in India. But some drawbacks are that India does not have adequate oil storage space.
India has an estimated over 15 million tons of oil assets. The maximum storage space available is just 5.33 million tonnes. The rest of the capacity is not prepared at this point. The current corona virus shutdown in India indicates that there is no substantial demand for oil from the industry. Indian refiners also have current stocks. Agriculture sector may enjoy the fall in price as the cost of fertilizers which are directly or indirectly related to oil may decline. Indian oil companies are unlikely to improve in near future.