High Rupee-Dollar ratio has off-set the low prices of oil as India is a net importer from the OPEC block
Oil has fallen to historic lows with crude oil ending at a negative $37.63 a barrel on April 20. The decline is 305 percent, or $55.90 per barrel.
On paper, this would mean that, since India imports oil from the Organisation of the Petroleum Exporting Countries (OPEC) block, lower prices in international markets would also bring down domestic oil prices. However, this effect is not proportional or immediate. Here is why:
Asian currencies, including the Rupee, are trading weaker against the US Dollar. With India being an importer and the bill being in dollars, the Rupee-Dollar difference may offset gains from lower oil prices.
The Price of West Texas Intermediate (WTI) crude has fallen. This is because the storage in Cushing (Oklahoma) in the US is full, and no more oil can be bought for storage while the demand has also fallen leaving stores untouched.
The supply of oil worldwide has continued to build. Even the recent deal by OPEC and other major oil-producing countries to reduce supply will not be fast enough, nor large enough, to drain the millions of barrels of unneeded crude present in the markets.
India largely imports Brent Crude from the OPEC block. Brent comes from the North Sea near Norway.
The spread between Nymex and Brent has widened as storage concerns are much more pronounced in the US as production facilities are landlocked. Compared to WTI crude, Brent prices are stable in the current situation (considering coronavirus).
Further, the Indian government regulates oil prices. This is done to off-set fiscal deficit against the subsidies given to state-run oil companies. As such, over the base price of oil, government taxes are applicable, which can increase the retail cost for consumers.
With the current economic situation at a standstill and revenues at their lowest, the government may depend on lower oil prices to offset the difference. Thus, any benefit - even if extended to customers - would not be as drastic as the raw crude price fall.
Also Read: The crude dynamics for India
The most popular retailed oils in India – petrol, diesel and kerosene – are all refined oils. This means that an additional fee for processing, transportation, distribution and taxes are added to the retail cost. Thus, rather than the price for the raw commodities, the refining adds cost.
With the current fall in global oil prices coming on the back of economic upheaval, it is likely to continue. The situation may not improve any time soon.
As per analysts, this kind of market dislocations could recur in coming months because fuel supply will outweigh fuel demand for the foreseeable future. The worldwide oil consumption is roughly 100 million barrels a day, but consumption fell by 30 percent globally, or about 30 million bpd, beginning in early March.