Covid-19 Impact: Crude Price Plunges To Lowest In 21 Yrs, But Turmoil May Benefit India; Here's How

It was estimated that the deal on output cut will help to control the oil prices, but the unprecedented fall caused by the falling demand due to Covid-19 crises have changed the game.

Post lockdown the oil supply may get tightened impacting the prices further. (Getty Image)

New Delhi: Oil prices have dipped to a 21-year low on Monday with the West Texas Intermediate (WTI) crude in the US sliding below the $15 per barrel mark. Currently, WTI crude is trading at $14.78 per barrel, lower by 19.5 per cent from its previous close. Brent crude was at $27.66, lower by 1.5 per cent from the previous close. The oil prices have continued to fall even as the top oil producers agreed to cut on the oil output. It was estimated that the deal on output cut will help to control the oil prices, but the unprecedented fall caused by the falling demand due to Covid-19 crises have changed the game. Why are the prices falling? The Covid-19 outbreak has almost brought the global travel industry to a halt, limiting demand for the commodity which has fallen by almost a third this year. Moreover, concerns with storage have also weighed on the markets as global storage is nearly full. Soon after the OPEC-Russia talks on production cut failed earlier in March, crude had fallen by more than 25 per cent, the largest fall since the 1991 Gulf War, to $34 per barrel on March 9. How long will the prices remain low? It’s difficult to predict how Covid-19 will pan out globally in the coming months and its impact on oil prices in the long run. Storage capacities for crude are already at its peak and in case the situation worsens due to Covid-19, then there are higher chances of more output cut. In case companies cut back on their production and later when economic activities resume in a full swing it would be a costly affair for those companies to restart production until crude prices reach the pre-Covid levels. Hence, post lockdown the oil supply may get tightened impacting the prices further. What does it mean for India? India is the world’s third-largest importer of oil and the fall in prices bode well partly. Firstly, it would reduce the import bill, and therefore the current account deficit by a big margin. This will eventually sustain the value of the rupee and also contain inflation. The fall in oil prices also translates to lower transportation costs and the government doesn’t need to subsidise oil much. The government can also consider imposing levies on fuel without hurting demand. This helps the government earn more revenues from taxes and reduce its fiscal deficit. However, imposing taxes on fuel may not be easy because of the Covid-19 outbreak which has already hurt the economy and refining companies already feeling the pinch with low demand. Not just businesses, it can also impact the remittances to India. In fact Middle East countries, mostly oil-based economies will be at a risk from the price fall, and these countries account for more than half of remittances to India. Such a sharp fall in crude prices earlier has led to a sharp drop in equities of emerging markets including India. (With inputs from IANS)