Corona, split in Opec+ may bring crude relief

NEW DELHI: 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. When Modi became PM for the first time in May 2014, India’s crude purchase cost $108/barrel. By the third year, it had more than halved to $48/barrel.

Something similar could be happening again. 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. 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.

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.


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