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What’s cooking on the crude oil front and how could it affect you? Since early October, crude oil prices have plummeted by almost 30% as the prospect of a glut in the world markets loomed large.

Indian Economy & Policy | NA



What’s cooking on the crude oil front and how could it affect you?

Since early October, crude oil prices have plummeted by almost 30% as the prospect of a glut in the world markets loomed large. 


A combination of factors - such as the possibility of global trade wars, a slowdown ininternational growth and lower demand from the Middle East and China – all fuelled these fears. But above all these, the biggest concern was the Trump administration’s equation with  Iran. At first, the prospect of US sanctions against  Iran triggered a sharp rise in prices. Then, the exemptions from the sanctions granted to a number of the Middle Eastern state`s biggest buyers sent the price of Brent crude tumbling.

 

Now the most recent pick up, in the first week of December 2018, seems to have been driven by the outcome of the G20 talks. At the summit, the US and China agreed to not escalate the tariff war and take immediate efforts to address issues of mutual concern based on mutual respect, equality and mutual benefit. Oil traders reacted bullishly to this political ceasefire between the United States and China. The price of Brent rose to 4.3% in early trades assuming that China would revoke its decision to cut out imports of US energy commodities such as crude oil, coal and liquefied natural gas (LNG) from the US.

 

But all that is still tentative and the upcoming Opec meet in Vienna will give further direction to oil price movements.Accordingly, the 15-member meet, which includes Saudi Arabia and Kuwait, and allies from outside the group, including Russia, is perhaps the most keenly awaited since 2016.

 

On the face of it, the meet is expected to deliver a consensus on lower global output towards stemming a further drop in prices. However, it seems unlikely that the amount of cutbacks will be decided on, much less inked, as Opec-principal, Saudi Arabia, still faces pressure from the US President Donald Trump, to keep output high and prices down. Being a key political ally,Saudi Arabia may be forced to oblige. There is, however, sure to be some reduction in production agreed upon. But it’s unlikely this amount will be adequate to drive prices up substantially.

 

On the flip side, if traders get a sense that the agreement to restrict supply is just cosmetic, they are likely to begin selling hard and fast, driving prices down further. Either way, a substantial price rise is unlikely while the downside possibility is wide open.

 

What does this mean for India?

Lower crude prices immediately translate into a smaller trade deficit as it shrinks our import bill. It also quickly translates into more benign inflation and even a stronger rupee, perhaps. All in all, it looks like happy days are here again.


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