Oil looks set to turn Narendra Modi’s friend once again

Oil looks set to turn Narendra Modi’s friend once again

For India, which imports 83 per cent of its oil, an extended spell of low prices will bring down fuel prices faster and leave money in the government’s kitty for incentives to revive growth without pulling back on social spending

Oil could once again prove to be Prime Minister Narendra Modi’s friend at a time his government is grappling with economic slowdown. The end of the three-year marriage between Saudi Arabia-led OPEC and Russia, coming amid faltering global demand due to economic impact of the coronavirus outbreak, could hammer oil prices below the $40/barrel mark, various estimates say.

For India, which imports 83% of its oil, an extended spell of low prices will bring down fuel prices faster and leave money in the government’s kitty for incentives to revive growth without pulling back on social spending.

Moscow jilted OPEC at Friday’s crunch talks in Vienna for deepening the current production cut to nearly 4% of global supply. Riyadh responded by announcing discounts of $6-8/barrel and plans to raise production up to 12 million barrels per day, or 23% higher than the current level. Other West Asian producers will certainly take the cue, which will set off a price war and deepen the glut.

This is reminiscent of November 28, 2014, when Saudi Arabia started a price war by stonewalling an OPEC plan to cut production and offered discounts to squeeze low-cost US shale oil from grabbing market share. The shock waves from that move sent oil prices into a near-freefall, with Brent tumbling to $29.11 per barrel on November 1, 2016.

The crash had allowed the government to shore up finances by raising excise duty nine times between November 2014 and January 2016 and splurge on big-ticket social schemes. In May 2014, when Modi became PM for the first, India’s crude purchase cost $108/barrel. It more than halved to $48/barrel by the thrid year of his first term. A Macquarie Capital Securities India report that year had said a $10/ barrel fall in oil price would reduce India’s import bill and the current account deficit by $9.2 billion, or 0.43% of the then GDP.

Something similar could be happening again. Goldman Sachs has slashed its oil price forecasts, expecting Brent to trough in April at $45 per barrel before gradually recovering to $60 by the end of the year. That was before the OPEC-Russia split. A further downward revision is very likely. India’s 2019-20 crude purchase has averaged $64/barrel so far and is likely to be little lower at final count, while the government’s maths is based on a $65/barrel.

Market trackers across the board, including International Energy Agency and IHS Markit, have projected record delcine in oil demand as coronavirus mauls markets. Under the circumstance, oil prices could simply wilt under the twin impact of the OPEC-Russia split and Riyadh flooding the market.

Cheaper oil reduces drag on government finances by reducing subsidy outgo and import bill — the latter improving balance of payments position. Lower demand for dollar to pay for oil helps the rupee. Low fuel prices brings down cost of living and services, creating ground for putting money into people’s pocket by reducing interest rates.

Oil prices have risen gradually since 2017 but in largely range-bound chunks, especially since the brief spell when Brent maxed out at $84.58 on January 10, 2018. A spell of cheaper oil, at least for the first six months as predicted by market trackers across the board, will be a good beginning for 2020-21.

https://energy.economictimes.indiatimes.com/news/oil-and-gas/oil-looks-set-to-turn-narendra-modis-friend-once-again/74545034

Share Button

Sharing is caring!

Leave a Reply