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Prices decline by over 60 per cent since January, but petrol and diesel prices in India have not become cheaper

By   |  Published: 22nd Apr 2020  12:13 amUpdated: 21st Apr 2020  11:09 pm
Oil prices traded in negative territory for the first time as the spread of coronavirus (Covid-19) impacts demand. — Photo: AFP

Hyderabad: Global oil consumption has fallen due to the COVID-19 pandemic to an unprecedented level that traders are willing to pay customers to get rid of the barrels they can’t store. The world does not have enough oil storage capacity.

The dramatic collapse in worldwide demand for oil led to an extraordinary development on Monday with the US oil prices falling below zero for the first time ever.

The US oil benchmark West Texas Intermediate crude, which closed at $18.27 a barrel on Friday fell to end at a negative $37.63 a barrel on Monday, a fall of $55.9 a barrel. Negative prices means some traders paid buyers to take oil off their hands. The oil prices globally have fallen by over 60 per cent since the beginning of the year. Yet, petrol and diesel prices in India have not become cheap. Petrol and diesel continue to sell at Rs 69 and Rs 62 per litre respectively in India.

Asian currencies, including the Indian Rupee, are trading weaker against the US Dollar. India being an oil importer and its import bill being in dollars, the Rupee-Dollar difference offsets gains from lower oil prices. Also, petrol, diesel and kerosene are all refined, which means that an additional cost for processing, logistics, distribution and taxes are added to the retail price.

Rather than the crude price, the refining process adds up to the overall cost of the commodity.
Anil K Sood, co-founder of the Hyderabad-based Institute for Advanced Studies in Complex Choices (IASCC) told Telangana Today, “The Indian basket of crude oil is priced around Oman and Dubai and Brent averages, which have not dropped as much as West Texas Intermediate (WTI) on Monday. We, therefore, may not expect a large fall in prices for the Indian basket, unless, of course, Brent too crashes as badly as the WTI, which is very unlikely. The WTI crash is also expected to be a temporary phenomenon, as the prices will correct once the US producers start slowing down production in line with demand.”

“Growth in demand for petroleum products in India has been continuously slowing down after reaching a peak of 11.6 per cent during 2015-16. During the year ending March 2020, the growth in demand was just 0.20 per cent, lowest since 1999,” he added.

The Indian government has used oil to shore up its revenue base. It was an easy way to raise resources during 2014-15 to 2016-17, when the economy was growing, and therefore demand for petroleum products was also growing. Given the economic slowdown during the last couple of years and now the Covid-19 related lockdown, we expect the demand for petroleum products to fall sharply, which will impact the government’s ability to raise resources.

“It is in this context that the Central Government again raised the excise duty last month, even when the crude prices were crashing globally. Given that the government is currently under pressure to raise revenue, I would not be surprised if we see further increases in excise duty or GST on some of the petroleum products. The core premise behind the central government’s policy choice is the need for raising revenue rather than consumers benefiting from lower global prices,” Sood observed.

In the current situation, where economic activity is falling sharply, if the government wants to maintain its revenue base from taxes on petroleum products, it will need to raise taxes more sharply than it has done in the past. Another aspect to notice is that the share of States in taxes on petroleum products has fallen sharply since 2014-15.

Foreign exchange reserves

India is heavily dependent on oil imports but the Covid-19-induced lockdown means that the country’s oil consumption will reduce. Falling oil prices and dipping imports due to subdued consumption in India are likely to offer some cushion to foreign exchange reserves, standing at $476.47 billion. The reserves increased by 14.71 per cent in the last year, improving the foreign exchange cover.

High foreign exchange reserves are considered to be helpful for a developing economy, which has a large Current Account Deficit. Adequate reserves enhance a country’s potential to survive economic shocks. These reserves are often treated as backup funds that can be used at times of financial crisis. They play a key role in increasing international trade, controlling inflation and maintaining the currency value.

However, if the crude oil prices increase in the international market, because of the recent agreement between Russia and Saudi Arabia, India’s import bill could further rise as the nation doesn’t have any alternatives to replace oil to its full capacity. Oil constitutes about 27 per cent of India’s imports and a higher import bill would mean additional burden on its foreign exchange reserves.

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Global patterns

“The extreme drop in the price for WTI crude futures for May 2020 is a unique phenomenon caused by filling of or committed hiring of storage capacity in the USA, where demand has not kept pace with growth in supply of crude. We have a production glut in the US and globally. We, therefore, expect oil prices to remain soft in Asia and Europe too, particularly if OPEC+ does not cut down its production significantly and/or if the US producers increase their supply to Europe and Asia,” Sood noted.

Oil demand continues to fall, and despite a deal among oil producing nations including Saudi Arabia and Russia to cut the production, there is no place to store the oil the world is producing- about 100 million barrels a day.

While the oil price has seen a steep fall due to dipping demand owing to the lockdown enforced worldwide to contain the pandemic, global demand for oil is likely to witness its worst ever drop this year, according to the International Energy Agency (IEA).

The agency estimates a drop in demand of 9.3 million barrels a day this year. The IEA, which advises countries on energy use, expects the slide in demand to be the most intense this month, calling it a “Black April” for the energy market, dipping 29 million barrels a day, levels not seen in the last 25 years. The crude oil price has fallen since January due to a price war between Saudi Arabia and Russia and the economic devastation brought by the Covid-19 outbreak.

Saudi-Russian price war

A Saudi Arabia-Russian price war compounded the oil crisis earlier, with both nations ramping up production in a bid to hold on to market share. Oil prices have been hit due to the global economic slowdown.

However, the top global oil producers are now considering cutting production by 20 million barrels per day under the terms of a deal to boost prices. The US President Donald Trump, who took credit for mediating the deal among the oil producing nations, said the agreement was bigger than expected and will help the energy companies recover from the impact.
However, the pact to cut between 10 million-20 million barrels of oil from the market from next month looks practically not useful.

Oil producers have continued to produce near-record levels of crude into the market even as experts warned that the coronavirus outbreak impact would drive oil demand to its lowest levels since 1995. The emergence of negative oil prices is likely to prompt some oil companies to shut down some of their rigs and oil wells to avoid facing bankruptcy situation.

Building strategic reserves

Several countries such as India, China, South Korea and the United States will look to buy more oil to create strategic reserves to meet future needs. The slide in oil prices has reduced production in many non-OPEC countries as the cost of pumping crude exceeds the gains from selling it in the market. Such declines in the US, Canada, Brazil and Norway are leading to a decline of 3.5 million barrels a day.

The IEA hints at a possible recovery in the second half of the year though there remains a lot of uncertainty over how the pandemic will continue to affect the global economy.

India, according to the Ministry of Petroleum, will by early May fill its underground strategic oil storage with crude available globally to shore up against any supply or price disruption. While the 5.33 million tonne of emergency storage adequate to meet the domestic oil needs for about 10 days was built by the government, state-owned oil firms have been asked to procure oil at cheaper rates from the market and store them.

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