Markets worldwide were in for a rude shock on March 9, after global crude oil prices fell almost 30 per cent, with Brent crude prices falling to $32 a barrel. The tremors were felt in the Indian stock markets too, with the benchmark Sensex recording its worst ever intra-day fall at over 2,200 points on March 9. The Sensex made some minor gains on Wednesday (March 11), as oil prices recovered a bit from the shock of Monday, reaching $35.95 to a barrel, which also calmed the markets to an extent. The Sensex was marginally up by 62 points on March 11 to close at 35,697.40 on the Bombay Stock Exchange.
But what led to this sudden slump in oil prices? It all started with the scare brought on by the spread of coronavirus disease (COVID-19), which is expected to have a major adverse impact on the global economy. COVID-19 has till date infected 121,312 people in 120 nations and territories as on March 11, with over 4,379 deaths reported worldwide. China alone reported 80,788 infected and 3,158 dead since the disease outbreak in December 2019. Under the shadow of the pandemic, it has been forecast that oil demand will fall in calendar year 2020, with demand growth estimated to be less than 0.48 million barrels per day (mb/ d) from 1.1 mb/d forecast earlier.
The Organization of Petroleum Exporting Countries (OPEC) held an emergency meeting in February in order to recalibrate its production cuts for the rest of the year. The plan was to cut production by another 1.5 mb/ d till the end of 2020, which would have reduced global supplies by 3.6 per cent. However, Russia refused to align with the deal. This led to Saudi Arabia slashing prices and setting plans for a big increase in crude production in April, sending oil prices crashing globally. Oil prices have fallen by 31.7 per cent since from the start of the calendar year till March 9. “The outbreak of COVID-19 has shaken the oil market fundamentals, depressing the demand prospects of the commodity despite the implementation of the OPEC and non-OPEC supply induced cuts,” Care Ratings said in a note.
According to a Morgan Stanley report, the current sharp fall in oil prices is taking place against a backdrop of weak global growth, which is likely to dip further due to the impact from the coronavirus. And the volatility in the global financial markets has led to a tightening of financial conditions, which will likely amplify the problems. The report goes on to add that the decline in oil prices will negatively impact the capex outlook for oil-related sectors as well as oil-producing countries. Second, credit markets in the US as well as for emerging oil producers will likely react negatively, leading to a further tightening of financial conditions. Finally, while lower oil prices will translate to lower retail prices, this positive benefit will not be fully realized, as consumers may not resort to higher spending in the near term amid an overall gloom in the economy and the financial markets.
For 2020, several banks and rating agencies have revised their oil price outlook. Barclays said on March 11 that it has cut its forecast for Brent crude to $43 a barrel from $59. Standard Chartered cut its Brent crude outlook to an average $35 a barrel for this year, down from $64 a barrel earlier. Care Ratings said that crude prices will range between $40-45 a barrel till the situation is contained globally. Prices could fall even below $40, it cautions.
India, which imports 85 per cent of its oil requirement, is one of the significant gainers from the oil prices slump. The low oil prices could translate to a lower oil import bill and easing of the current account deficit and inflation. According to ICRA, while the rupee will come under pressure, our overall oil import bill should fall. Every $10 a barrel decline in oil prices would mean a saving of $15 billion in India’s net oil import bill. India spent $111.9 billion on oil imports in 2018-19, up from $87.8 billion in the previous fiscal year.
In the current financial year, India imported 4.5 mb/ d (April-January) of crude oil and our import dependency based on consumption has increased to 85 per cent compared to 83.5 per cent a year ago in the same period. So clearly, there would be a significant reduction in India’s import bill. Suman Chowdhury, president, ratings, atAcuité Ratings and Research, says savings on oil imports could amount to $30 billion in 2020-21 if there is no significant uptick in global demand. This will also arrest the rising inflation and facilitate the next round of rate cuts by the Reserve Bank of India, says he.
According to Care Ratings, crude oil and its products have a weight of 10.36 per cent in the wholesale price index, so any decrease in the price of crude oil will impact the WPI inflation number commensurately. Governments will continue to benefit from the crude price fall, as they are not likely to pass on the impact of the soft crude prices completely to the consumer. The windfall gains for the government can be used to bridge the fiscal deficit or spend on welfare measures and infrastructure.
News Source: India Today