Crude oil prices tumble 30%, India set to gain from price war

New Delhi: India's oil import bill is expected to fall by a sharper 10 per cent in FY20 as the increasing spread of coronavirus and now the fallout of talks between OPEC and Russia has depressed the crude oil prices to about $30 a barrel now against a high of over $70 a barrel in September and again in January this year.

The bloodbath in the oil market has continued into the new week with crude oil prices slumping to around 30 per cent on Monday to just about $30 a barrel after Saudi Arabia shocked the market by launching a price war against one time ally Russia.

With this in FY21, India's import bill could slip to half of current levels at $64 billion witnessed in FY16 when crude had fallen to $26 a barrel for some time.

According to oil ministry's Petroleum Planning and Analysis Cell (PPAC), country's oil imports is projected to fall to 225 million tonnes (mt) in FY20 against 227 mt in FY19 while the import bill would reduce 6 per cent to $105 billion from $112 billion worth of imports in previous fiscal.

If the price remains around $30 for most parts of 2020, import bill could reach its all time low in many years. The potential is it could fall to $64 billion in FY 21, the same as FY16 when crude prices slipped below $26 a barrel.

A one dollar fall in crude oil price results in reducing country's import bill by almost Rs 2,900 crore while a rupee fall in value of currency against dollar results in increased spending by up to Rs 2,700 crore.

On a monthly purchase of oil worth $10 billion monthly, the additional savings for the months of January-March 2020 itself works out to about $10-15 billion. This would easily bring down the import bill to below $100 billion mark after a gap of almost one year.

While India imported crude oil worth $112 billion in FY19, its import bill has transited substantially lower in the previous three financial years with oil import bill standing at mere $64 billion in FY16 when oil prices slipped on over supplies, especially with the entry of US shale oil.

Lower volume of crude processing by fuel refiners is also expected to have an impact on import bill.

For India, lower oil prices act as big incentive as the country depends on imports to meet 86 per cent of its oil requirements. Lower import bill would also have positive impact on country's fiscal deficit that had already slipped from earlier targets in the wake of higher government expenditure this year to curb falling GDP growth.

The dependency of imported crude (on consumption basis), on the other hand, has increased from 82.9 per cent in FY18 to 83.7 per cent in FY19, meaning we are producing less oil and depending more on imports to meet domestic requirements. This dependency has consistently increased in all five years of the Modi government.

Crude production in India has stagnated around 35 mt for past decade. In FY19, domestic crude production has dropped to 34.2 mt from 35.7 mt in the previous year.

Despite best efforts of the government, domestic oil production has not increased.

Bloodbath in oil market

Late last week, talks between oil cartel Organization of Petroleum Exporting Countries (OEPC) and Russia collapsed as the two sides failed to agree on an output cut deal. This pushed Saudi Arabia, the world's largest oil producer, to cut its crude prices and announce increase production leading to a mayhem in an already over supplied oil market.

Crude is trading down 22 per cent to $32 a barrel. Brent crude, the global benchmark, has also plunged 22 per cent to $35 a barrel. Both oil contracts are on track for their worst day since 1991 Gulf War.

US oil prices crashed as much as 27 per cent to a four-year low of $30 a barrel.

The fear in the market now is that oil prices may crash further as Saudi Arabia is taking aggressive stance and is expected to flood the market with crude in a bid to recapture market share. Analysts have said that Saudi Arabia had slashed its April official selling prices by $6 to $8 a barrel in a bid to retake market share and heap pressure on Russia.

The failure of OPEC-Russia deal on production cuts has the genesis on growing prowess of the United States in oil export market. Russia has been dropping hints that the real target is the US shale oil producers as any production cuts by them helps US producers extra space in the market. OPEC led by Saudi Arabia wants production cuts to be expanded in an oversupplied market to prevent further erosion in oil prices that is also facing huge demand squeeze aggravated by the spread of Coronavirus.

The failure of talks has also resulted in a crash of Stock markets across the Gulf. Saudi Arabia's stock exchange, the Tadawul, was down 7.7 per cent in afternoon trading on Sunday. The Abu Dhabi index fell 5.8 per cent, Dubai's Financial Market General Index was down 7.47 per cent.

Shares of Saudi state oil giant Aramco traded below their original IPO price for the first time on Sunday, at 30.90 riyals ($8.24) in Riyadh compared to the listing price of 32 riyals in December. That's down 6.36 per cent on the day.

(With inputs from IANS.)