Explained: The fall in crude oil prices, and its impact in India

The price of crude oil has fallen to just above $100 per barrel from $139, which was the highest level in 14 years. Why are crude prices cooling, and what impact will it have in India?

Storage tanks at an oil refinery in the United States. (Reuters Photo: Bing Guan)

The price of crude oil fell below the $100 barrel mark on Tuesday, after a two-week period which saw the cost rise to $139 per barrel, its highest level in 14 years. Brent crude gained on Wednesday to reach $102.7 per barrel, which is still up about 32 per cent from $78.11 per barrel at the beginning of the year.

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Why are Brent crude prices cooling?

A surge in Covid-19 cases in China, the largest importer of crude oil, and signs that a nuclear deal with Iran could boost global crude oil supplies, have helped cool oil prices which have been rising steadily since the beginning of the year due to the Russia-Ukraine crisis.

China has announced new lockdowns to curb the spread of Covid-19 infections, which have hit a two-year high in the country. Concerns about the impact of the surge in China on crude oil demand helped lower prices.

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Separately, reports that talks are ongoing between the US, Russia and Iran to revive a 2015 nuclear deal have also eased supply concerns in the global market. Iran had, under the 2015 deal, agreed to limit its nuclear programme in exchange for relaxations in economic sanctions that restrict Iranian oil exports. Talks had stalled with Russia seeking a guarantee that western sanctions on the country would not impact the country’s economic ties with Iran.

However, Russian Foreign Minister Sergei Lavrov said on Tuesday that Russia had received written guarantees that the country would be allowed to carry on its work under the deal unimpeded. Experts noted that Iran can increase its crude oil production by about 1.5 million barrels per day over a few months if sanctions on oil exports are removed.

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What is the impact in India?

India imports about 85 per cent of its crude oil requirements, and high crude oil prices usually translate to higher prices of petrol and diesel at the pump. However, oil marketing companies (OMCs) have held the price of petrol and diesel constant since November 4, despite the price of crude oil rising by about 27 per cent during the period. Analysts expect that OMCs will soon begin raising petrol and diesel prices in line with international prices for petroleum products.

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Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has said the government is in talks with Russia to procure crude oil. “Discussions are currently underway. There are several issues to be gone into like how much oil is available,” Puri said in Parliament.

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Russia has been offering crude oil cargoes at discounted rates since the EU decided to bar seven Russian banks from the SWIFT financial transaction messaging system, making it difficult for Russian oil cargoes to find buyers. Some buyers have also decided against purchasing Russian crude over potential reputational damage from buying crude from Russia during its invasion of Ukraine.

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