CRUDE OIL SPIKE

Brent crude oil spike prices surpassed $100 per barrel since 2014, this is after the Russian president ordered troops into eastern Ukraine.

CRUDE OIL SPIKE IN PRICES

The Brent crude prices have risen by over 50% over the past year and have also been helped by the recovery in demand as covid-19-led restrictions eased globally.

According to a report, the recent rally in ONGC’s stock prices is largely fuelled by high crude oil and natural gas prices, even as its production is on the decline and capital expenditure is on the rise to sustain the falling production.

The normalization of supplies, in the near term and a push for sustainable renewable energy, in the long run, would act as a dampener for crude oil prices.

Reasons for increased crude oil prices

The massing of troops by Russia near the Ukraine border is one of the major reasons for the oil market to heat up, as the West fears a Crimea-style annexation attempt by Russia in the region.

Russia makes up for a third of Europe’s natural gas and about 10% of global oil production. About a third of Russian gas supplies to Europe usually travel through pipelines crossing Ukraine.

Russia Ukraine War Map

The immediate rise in prices in January was sparked by renewed tensions in the Middle East following a drone attack on three oil tankers in Abu Dhabi that killed three people, including two Indians, and wounded several others.

According to the IEA, crude oil prices increased in 2021 as rising Covid vaccination rates, loosening pandemic-related restrictions, and a growing economy resulted in global petroleum demand rising faster than petroleum supply.

Also, global petroleum production increased more slowly than demand, driving prices higher.

The slower increase in production was mostly attributable to crude oil production cuts by OPEC or the Organisation of Petroleum Exporting Countries and some other nations including Russia (referred to as OPEC+) which started in late 2020.

IMPACT ON INDIA

Import dependence: as India imports a lion’s share of its fuel requirements so the higher oil prices are bad news for the Indian economy.

The benchmark crude prices have now risen by more than 50% over the past year.
Since, India buys very little oil and gas from Russia, partly because most Indian refineries cannot process the heavy crudes that Russia exports and due to transportation costs from Russia to India, the near-term disruptions to the Indian economy will be minimal; but the main effect will be via the indirect impact on global oil prices.

Impact on inflation: the higher prices have a negative influence on inflation and the current account deficit (CAD) of the country.

India could face higher inflation for a long period unless the government sharply cuts taxes on petrol and diesel. India, a net importer of oil, buys very little oil and gas from Russia.

Impact on oil companies: upstream oil companies like Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd stand to benefit even in a higher oil price environment.
Both the companies have seen a meaningful jump in their price realisations during the December quarter results (Q3FY22).

Impact on state-run oil companies: the marketing margins for the state-run oil marketing companies (OMCs) would come under pressure if retail pump prices are not increased sufficiently when crude prices rise.

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