The impact of lower oil prices

The impact of lower oil prices

Brent crude prices dropped to a three-month low on 14 March to $51 a barrel (see chart). That’s despite Opec’s (Organization of the Petroleum Exporting Countries) efforts to cut production and stabilize the market. Increasing rig counts and high oil inventories in the US are weighing on crude oil prices.

What’s more, as Sugandha Sachdeva, assistant vice-president and in-charge (metals, energy and currency research) at Religare Securities Ltd, points out, sentiments have further soured as Opec in its recent monthly report increased its 2017 forecast for oil production outside the group, which indicates the oil markets may take long to move close to balance.

In its latest monthly oil market report, Opec said for 2017, non-Opec oil supply is now projected to grow by 400,000 barrels per day (bpd) to average 57.74 million bpd, up by 160,000 bpd from the February report. This is driven by higher expectations for Canada, the US and Russia. “It seems that the oil supply recovery is gathering momentum in the world oil market, stimulated by gradually rising prices as well as improvements in drilling efficiency and well productivity in North America,” said Opec.

Sachdeva says: “In fact, it won’t be surprising if Brent crude drops to $47 a barrel in the near term, as it has shifted gears to downside after the prolonged consolidation phase.”

Lower oil prices are good news for India, considering we import a huge portion of our oil requirements. It will lower inflation.

In general, the drop in crude oil prices should lead to a decline in global petroleum product prices as well. Locally, apart from global petroleum product prices, the rupee-dollar exchange rate also plays an important role in determining prices.

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Lower prices tend to have a positive effect on demand for products. But, according to data from Petroleum Planning and Analysis Cell, domestic petroleum products consumption growth in the country has slowed down in the last three months. As of now, analysts think this is temporary and hence, there is nothing to worry about yet as far as oil marketing companies (OMCs) —Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—are concerned. Read More…


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