A few years back an Indian minister surprised many by actually making a formal request to Saudi Arabia to consider the plight of less advantageous countries such as India before raising crude oil prices further. Then, the crude oil prices were on an upswing, and producers held the trump cards. Today, countries like India are surely not complaining.
Since Narendra Modi-led National Democratic Alliance government assumed the office at Raisina Hills, global crude oil prices have steadily declined. From about $110 per barrel then, prices of different varieties of crude oil have dropped to between $35-37 per barrel.
Experts remain divided on the outlook. Forecasts for 2016 range from between halving of crude oil prices from the current levels to a modest increase from these levels. Yet, the consensus seems to indicate that oil prices will remain soft most of next year, barring any unforeseen factor.
For India, the fall in oil prices has brought benefits on several fronts, including helping the government contain its fiscal deficit, very critically keep inflation under check and spend more of the saved money on infrastructure and railways. For the RBI smaller import bill means narrower Current Account Deficit (CAD), which in turn helps the currency remain stable and all these factors in turn help it keep local interest rates steady.
Brent crude, which India imports on a larger scale, is around $37 per barrel and experts forecast the commodity has not as yet seen the bottom.
A confluence of factors including overproduction of crude oil, re-entry of Iran into the market following lifting of US-led sanctions against it for its refusal to open its nuclear facilities for international inspections, slowing global economy and an unusually warm winter in the northern hemisphere requiring less consumption of oil for heating purposes.
Since the last OPEC meeting on Dec 4 crude oil has been on a southward journey every single day, except for a brief while yesterday for profit taking. The next OPEC meeting is due sometime in mid-2016, unless panic prompts them to hold early confabulations. Over last year, crude oil prices have almost halved and have declined about three-fourths since 2011.
With no major producing country such as Saudi Arabia and Russia relenting on cutting production, oversupply is only to be expected, much to the disappointment of others such as Venezuela, which are flexible.
For major producers it’s a double whammy. The global economic turmoil over the past few years and an imminent increase in the U.S Fed rate are only adding to their troubles. Increase in US interest rates are expected to strengthen the US dollar, push down crude oil prices further and hurting economies of the producers.
Overall downtrend in most commodities, and a modest slowdown in Chinese economy have hurt the commodities exporters, and weakening their currencies. India, as in the past, is busy squandering the golden opportunity offered to it on a platter. One can only hope the government pushes ahead with critical executive decisions till such time parliamentarians sort out their differences and give priority to national interests.
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