Oil prices decline by 18%, boosting India's CAD in election season

When  Brent prices crossed $80.91 a barrel on October 15, India was staring at even higher crude oil prices. Within a month, the prices have come down by almost 18 per cent, giving relief to the domestic fuel market and hopes of softening of the current account deficit (CAD).

Following the drop in international crude prices, the price of petrol in Delhi dropped by 5.3 per cent from Rs 81.63 a litre a month ago to Rs 77.28 a litre on Thursday. With election season on, this is good news for the government, which received flak from various quarters over increase in fuel prices.

Diesel prices also dipped 4.4 per cent from Rs 75.46 a litre to Rs 72.09 during the same time. The decline in prices started after market concerns regarding Iran sanctions got reversed following the United States waiver for 180 days to eight countries — India, China, Italy, Greece, Japan, South Korea, Taiwan and Turkey. Iran is the third largest supplier of crude oil to India, after Iraq and Saudi Arabia.

Experts said oil prices are unlikely to weaken further after Saudi Arabia’s comment to cut production by 500,000 barrel per day December onwards. Other reasons behind the decline in prices are the rise in US tight oil production and the slowdown in global economy due to the ongoing trade war between the US and China.

According to reports, there has been an increase of 400,000 barrels per day in US oil production during the first week of November, pushing the total US output up to 11.6 million barrels per day (mbd).

Experts said the high volatility in crude oil prices will continue in 2019. “Oil markets are reacting to a demand slowdown scenario in 2019, US sanctions on many countries from buying Iranian oil and a ramped up supply from the US. Huge volatility in oil prices will continue in 2019. However, the current corrections give a huge breather to India on the fiscal front,” said Debasish Mishra, leader for Energy and Resources at Deloitte in India.

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According to a report by Care ratings, the price decline will have an impact at the macro level with imports of 1,643 million barrels of crude oil in FY19. It cites that a dollar decrease in prices on a permanent basis would decrease the bill by roughly $1.6 billion per annum. “Thus, the fall in crude oil prices is to aid in softening the CAD,” the report said.

Similarly, it will have an impact on the wholesale price index (WPI) more than the consumer price index (CPI). Crude oil and its products have a weight of 10.4 per cent in the WPI. In terms of the CPI, fuel-related items have a weight of 2.7-2.8 per cent directly.
“Besides the US relief to eight countries, Russia, US and Saudi Arabia’s pumping of more crude to compensate for Iran supply deficit and slow economic growth due to the trade are the key reasons behind weak Brent oil prices which are now trading in contango (a situation where spot prices are lower than its future or forward prices),” said Abhishek Bansal, chairman of ABans Group of Companies, in its crude oil outlook. 

Every dollar increase or decrease in crude oil prices will lead to an increase of 63 paise per litre on petrol and diesel prices upwards or downwards, respectively. 

The average crude oil prices rose to $72.46 a barrel from July to September compared to $52.7 a barrel during the year-ago period. 

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