Oil war should benefit the consumer
As the world is grappling hard to fight the coronavirus, another concern that has hit the world economy is the crude oil price war unleashed by Saudi Arabia.
Post the unraveling of the Organization of the Petroleum Exporting Countries (Opec) oil markets are in a tailspin, resulting in one of the biggest one day fall in the international benchmark Brent crude prices.
The oil markets witnessed the worst price dip since the 1991 Gulf War as Brent prices plunged to $31.02 per barrel.
Brent was trading at $35.75 per barrel, a sharp fall from $45.27 per barrel and far lower than the highs of $147 per barrel in July 2008. The West Texas intermediate (WTI) was at $32.58 per barrel.
This has put major consumers such as India in an advantageous position. Saudi Arabia accounts for around 10% of the total global supply of 100 mbpd and is the second largest supplier of crude and cooking gas to India.
Saudi Arabia launched an all-out oil war Sunday with the biggest cut in its prices in the last 20 years, after a failure by cartel OPEC and its allies to clinch a deal to cut production.
A meeting of main producers was expected to agree to deeper cuts to counter the impact of the new coronavirus — but Moscow refused to tighten supply.
In response, the Gulf powerhouse cut its price for April delivery by USD 4-6 a barrel to Asia and USD 7 to the United States, with Aramco selling its Arabian Light at an unprecedented USD 10.25 a barrel less than Brent to Europe.
This means that oil prices… will likely be capped over the next few months as coronavirus stalls economic growth, and Saudi Arabia opens the pumps and offers huge discounts on its crude grades.
Global markets had already fallen heavily in recent weeks due to fears about the coronavirus, which has killed thousands and has spread around the world since emerging in China late last year.
Tokyo stocks were hit heavily hit at the open Monday on fears over the virus and the plunge in oil prices, with the dollar down against the yen.
The new developments are reminiscent of the oil price war that erupted in 2014 and sent oil prices crashing to less than USD 30 a barrel. The price fall then battered revenues in the Gulf countries, forcing them to resort to austerity measures and borrowing to plug budget deficits.
The supply glut will have a wide-ranging impact on energy markets. Every dollar per barrel drop in crude oil prices reduces India’s import bill by Rs10,700 crore on an annualized basis. Retail prices of petrol and diesel in India track global prices, not crude, but are broadly linked to crude oil price trends.
But since the margins are huge the additional benefit should be allowed to percolate to the consumer who is already hit hard by the worsening economic scenarios.
KV Network
