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Friday, February 26, 2021

Explained: The significance of crude crossing $60 a barrel

Why has the price of crude oil risen sharply? How will this impact India?

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: February 11, 2021 8:49:49 am
Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.

The price of Brent crude crossed the $60 per barrel mark on Monday after over a year on the back of oil-producing countries maintaining production cuts and expectations of improvements in global demand as the Covid-19 vaccine is rolled out across the world. The price of Brent Crude has risen by over 50 per cent since the end of October after prices had remained around $40 per barrel for five months.

We examine the impact of the recent rise in Brent crude price on fuel prices in India.

Why has the price of crude oil risen sharply?

Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic. However oil-producing countries have continued to limit production despite an increase in prices with Saud Arabia cutting its own oil production by 1 million barrels per day to strengthen crude oil prices.

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Expectations of strong improvements in demand with the global rollout of the Covid-19 vaccine have also put upward pressure on crude oil prices according to experts.

“Crude trades near Jan 2020 high supported by Saudi’s voluntary production cuts, improvement in virus situation in some US states, vaccination progress and hopes of additional US stimulus,” said Ravindra Rao, VP- Head Commodity Research at Kotak Securities.

How will this impact India?

The rise in the price of Brent crude will lead to an increase in India’s import bill. India imports of 80 per cent of its crude oil requirements and the average price of Indian basket of crude oil has already risen to $54.8 barrel for January.

The upward move in crude prices will also put upward pressure on petrol and diesel prices across the country which are already at all-time highs due to the recent rally in international crude prices as well as high central and state levies. Petrol prices hit new record highs on Tuesday across metros as oil marketing companies hiked the prices of both petrol and diesel by 35 paise per litre in the national capital taking petrol to a new high of Rs 87.3 per litre. Diesel prices in Mumbai set a new all-time high of Rs 84.36 per litre.

The government had hiked central taxes on petrol and diesel by Rs 13 per litre and Rs 11 per litre in 2020 to boost revenues amid lower economic activity. The increase in taxes had prevented consumers from getting the benefit of low fuel prices as international prices crashed during the first quarter of this fiscal and is now contributing to record high prices as international prices have recovered. Petrol and diesel prices in India are pegged to the international prices of the two products.

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