Deciphering the impact of current oil markets trends on India

Deciphering the impact of current oil markets trends on India

During the last week, India observed series of positive developments resulting from fall in oil prices, strengthening of rupee and BJP’s sterling show in the Uttar Pradesh (UP) elections. The cumulative impact of these events was observed on the share markets, which helped Sensex and Nifty rose handsomely to gain 0.6% and 0.8% respectively. The market capitalization of BSE listed firms spiked to a lifetime high of Rs. 120 lakh crore while Nifty too observed a new high with 9,153.7 points.

However, there exists a relationship between crude oil price, rupee-dollar exchange rates and stock market which in the past have impacted the Indian economy and continues to remain relevant in the future growth story.

Oil prices fall since peaking in June 2014 has put severe economic stress on oil producers around the world. It has also impacted the fiscal stability of countries such as Iran, Russia and Venezuela that relied heavily on foreign exchange earnings from crude oil exports. However, being a net oil importer, India benefitted significantly from fall in oil prices. Over the last couple of years, fall in crude oil prices played a greater role in improving India’s macro-economic fundamentals such as inflation, fiscal deficit and current account deficit.

Consequent to the Vienna Deal, OPEC and other nations joined together for oil production cuts, which helped oil price to increase sharply, fluctuating above $50 a barrel, until recently. These trends have worried Indian policy makers as reflected in Economic Survey 2016-17, wherein it stated that the short-term dynamism gained due to low oil price could be taken away. With international oil prices expected to remain 10-15% higher in 2017 compared to 2016, Survey projected a drag of about 0.5 percentage points in real GDP. Accordingly, oil prices, even in the range of $60-65, would stoke inflationary pressure, which could impact 

Indian economy by reduced consumption, less room for public investment and lower corporate margins, which could dent private investment. Inflationary pressure would invite monetary tightening, which would lead to squeeze on aggregate demand, impacting the economic growth.

On the other hand, decrease in crude oil prices as noticed last during last week helped the government manage its finances better as it translates into lower subsidies on LPG and Kerosene, resulting in lower fiscal deficit. Furthermore, besides its direct impact in the form of lower prices of petroleum products, it helps reduce the transportation cost. For industries, which use oil and its derivatives as input costs such as downstream oil, automobiles, paint, aviation and fast moving consumer goods, low oil prices offers positive impact. However, for upstream oil and gas companies, low oil prices directly hurts their realisations.

Thus, India’s ever increasing demand for oil would continue influence its growth and inflation levels. The International Energy Agency has projected India’s crude oil demand growth rate to be the highest by 2040, which will start driving the global oil markets, pushing its refinery capacity to grow rapidly, largely to accommodate greater oil imports. India’s refinery capacity already grew from 62 million tons per year in 1999 to 215 million tons per year in 2015.

It is in this vein India has set the target to reduce its oil imports by 10% in 2022 and by 50% by 2030 while taking several steps to increase domestic production of oil and gas, including exploration of deeper and shallow plays in existing fields and enhancement of production through early monetization of marginal fields. Earlier, in a resolution dated March 30, 2016, government introduced a new Hydrocarbon Exploration and Licensing Policy, having salient features such as, uniform license for all the hydrocarbons; marketing and pricing freedom; introducing Revenue Sharing model; Open Acreage Licensing Policy (OALP) and allowing 

100% foreign direct investment. Increasing the share of natural gas is also viewed as a measure to meet government’s objective of curbing oil imports.

While efforts to augment domestic oil and gas production is under way, the current oil market trends offer some respite to India as oil prices after staying over $50 barrels have once again came below $50 a barrel. While Brent crude futures for oil were at $50.89 a barrel, U.S. West Texas Intermediate (WTI) crude futures registered at $48 a barrel, thanks to bloated oil storage in the U.S. resulting from 8% rise in its oil production since mid-2016 to more than 9.1 million barrels per day.

According to Goldman Sachs, a longer lower oil prices resulting from ‘New oil order’ created by Second shale revolution of the U.S. is set to give oil consumers a big boost. India in this case would be one of the biggest beneficiaries. However, India would like to see oil prices to remain in a band of $55-60 a barrel, if not more, to make investments in difficult terrains such as deep and shallow waters a viable proposition. This will help India to meet the objective of cutting down on crude oil imports and reduce its fiscal and current account deficits.

* Manish Vaid is Junior Fellow with the Observer Research Foundation, having research interests in energy policy and geopolitics.

Disclaimer: The views express in the article are that of the author.

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