NEW DELHI: Jilted by Russia in its efforts to shore up crude oil prices, Saudi Arabia seems to have launched a price war with the largest cut in crude oil export prices in over two decades.
The move sent Brent crude rates crashing to $37 per barrel on Monday, but analysts warn the benefits of the price crash may remain elusive for India.
Brent crude prices saw the single largest fall in three decades during the day, 30%, before recovering some of its value.
While economists like Madan Sabnavis, Care Ratings’ chief economist, feel an oil price crash considered in isolation is always good for India since it relies on imports for over 80% of its oil needs, others note that the primary cause of the fall — demand destruction caused by the Covid-19 outbreak — is likely to cap these benefits significantly.
Technically, every $5 drop in prices could save India $12-13 bn in import costs, and the resulting fall in retail prices of transportation fuels will ease prices across the board giving RBI more room to cut interest rates.
But, Morgan Stanley analysts say in a recent report that “gains will remain capped” since lower oil prices will negatively impact investment by oil producers and ancillary sectors.
“The lower oil burden on consumers will likely not fully translate into higher spending in the near term as it is occurring against a backdrop of overall downdraft in the economy and financial market volatility,” it said.
Sabnavis also notes that ad valorem levies on oil will see a decrease with falling prices, which is likely to push a cash-strapped government to raise taxes, absorbing some of the benefit, before passing them on to the consumer. Government income from upstream oil companies like ONGC and GAIL will also take a beating with lower oil prices.
CRUDE Slide
WTI crude
Down 28.71% to $29.43 per barrel
Brent crude
Down 26.51% to $33.27 per barrel
On Multi Commodity Exchange
March delivery: Down Rs 943 (29.85%) to Rs 2,216 per barrel.
April delivery: Down Rs 899 (28.03%) to Rs 2,308 per barrel.