CRUDE OIL: FALL OF OIL PRICES EXPLAINED

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Meaning of a few terms used in the article

Brent crude oil: It is the oil extracted from the north sea. It is said sweet and purest form oil as it has very low sulfur content.

Indian oil prices depend on Brent crude prices.

Futures contract: it is a legal agreement to buy or sell a particular commodity at a predetermined price at a specified date in the future.

 Strategic petroleum reserves: It is the storage of oil by the government to use them in unexpected situations where the supply of oil is unavailable.

OPEC: Organization of the petroleum exporting countries ..it consists of 13 countries led by Saudi Arabia.

OPEC+: Institution consists of 13 countries in OPEC and other oil-exporting countries like Russia

Remittances: It is the money sent by the Indians from the host country where they went to work to their native state or country.

In January 2020, the price of Brent crude oil was 63$ per barrel, now in April, it fell to an 18-year low price of $20 per barrel. And the futures contract price of the oil still remains at about $21 a barrel.

Not only Brent crude oil but the oil prices of all other oils have also fallen and their future prices are expected to be low or even go below $0.

For example .. west Texas intermediate crude oil prices, extracted from the United states oil fields are expected to go below zero, which is at – $40 per barrel. That is a seller has to give 40$ in return to the buyer to hold the oil to be supplied to them.

Why did the oil prices decrease to this extent?

  • The common and main reason is the huge unexpected decrease in the demand from the highest consuming countries like China, India and even the United States due to the great lockdown- which imposed huge restrictions on the movement of the people and in turn on transportation sector to stop the spread of the coronavirus, which depend on the oil to run.
  • PRICE WAR: At a time when the demand for oil is reducing so rapidly, OPEC countries led by Saudi Arabia and Russia, the two biggest exporters of crude oil, have refused to decrease the output and in turn increased the output of the oil as they competed for the oil market after the COVID 19 is over. Thus, the increase in the supply of oil, when the demand for oil is decreasing has further declined the oil prices.

Impact on India:

Positive :

  • India imports almost 90% of the crude oil for its energy needs. So, the decrease in oil prices would help in the decline of the import bill. As India has to pay very less for the same amount of oil it imports.
  • By importing more at cheap prices, India can fill 11.83 million metric tonnes of oil in its strategic petroleum reserves located at Vishakapatnam (Andhra Pradesh), Mangalore, Udupi, and Padur (Karnataka), Chandikole (Odisha). It can help India cope with the supply shock for 22 days.

Negative:

  • Revenue loss: for India as the decrease in oil prices and lesser demand for it due to lockdown would highly reduce the revenue to the government for the government at a time when it needs revenue from all possible sources.
  • Loss in remittances: India receives 30% of its remittances from the West Asia region including Saudi Arabia and UAE. Due to low oil prices, the revenue of these countries would reduce and it may result in loss of their jobs or even cut in their salaries. So they would be left with very little money to send India.

WAY FORWARD : 

The OPEC + countries including Saudi and Russia have agreed to reduce the output by 9.7 million barrels per day in May and June to increase the oil prices.

However, seeing the future prices of Brent crude oil it can be assumed that the decline in oil prices would still exist and only an increase in demand for it and huge oil output cuts would help stabilize and increase oil prices.

-SATYA NARAYANA

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