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‘The (oil) market is stuck in a relentless downtrend’. This is how one of the analyst of a London-based brokerage firm summarised Friday’s fall of oil to below $40 per barrel in US market. Interestingly, current level of crude oil has not been seen since 2008-09 financial crisis.
Globally, crude oil market is stuck between two conflicting situations. On one hand, US production has been creating a glut in supply, putting pressure on pricing environment. On the other hand, key oil producing nations in West Asian region and Russia are unwilling to rationlise production by cutting supply as everyone is eager to protect its market share. So, the resultant impact is prices of oil have fallen below the key support level of $40 per barrel. Amid all this, rig count in US indicates, oil companies of world’s biggest economy are yet to decide on supply cut.
As per reports, Friday’s fall of US crude to below $40 level is attributed to addition of two oil drilling rigs last week by its oil firms. This indicates unwillingness on the part of US to reduce output of its shale oil, furthering the global glut. Also, low oil prices have kept investors on the sidelines as they are unsure of its future movement. Unless market is settled at a point or give some predictable indication, investors will not enter into the market.
Meanwhile, concerns over global growth prospects have aggravated pressure on oil prices. Especially, devaluation of yuan by China and subsequent plunge of its manufacturing figure reflects a grim picture of world’s second largest economy. Analysts fear a slowdown in China, could be a drag on global growth and curb energy demand, which is a bad news for oil prices at a time when markets are already oversupplied with crude.
In this kind of scenario, unless US and producers from the Organisation of the Petroleum Exporting Countries (OPEC) decide to reduce supply, oil prices will be steady in its fall.
Cheers for India:
Though low oil prices will hurt producing nations like most of the West Asian economies, Russia, Venezuela among others; it will bring cheers for Indian economy. India, which is the fourth largest consumer of oil, will be the biggest beneficiary of such free fall in oil prices. As per reports, a $10 fall in crude oil prices is likely to reduce the current account deficit by around 0.5 per cent of GDP and fiscal deficit by 0.1 per cent of GDP. So, India will save of its import bill and foreign exchange due to such fall. Further, government spending on various subsidies will also fall owing to low prices, which will supplement government spending on core infrastructure sectors. Also, low oil prices have benign impact on inflation. As seen in the recent past, negative WPI based inflation figure and sub-5 level CPI based inflation are the outcomes of low oil prices along with host of other factors. Low inflation prompts the Reserve Bank of India to lower interest rate and any monetary easing prop up the domestic economy. In this context, oil prices will not only give higher leverage to the government for higher public spending, it will also support a higher growth trajectory.
Bottom line of oil firms may be hit:
Amid all this gain in Indian fiscal space, domestic oil firms may be impacted due to low oil prices. Normally, higher oil prices have a positive co relationship with refining margin. So, any fall in crude oil pricing is definitely going to impact bottom line of oil refiners in the country.
Some interesting facts:
- During mid-1980s to 2003 period, price of crude oil per barrel was hovering below $25 level
- Since then, it has witnessed a upsurge with prices slowing rising to $60 per barrel in 2005
- Oil prices have peaked at $147.30 in July 2008, indicating huge demand from major consuming countries like US, China and India
- High oil prices prompted search for new oil sources with application of new technologies by Western nations, which discovery of shale oil sources in US and Canada
- Shale oil discovery has changed the landscape of oil market with US emerging as one of the major producer of the commodity
