Crude oil price falls to a 12 year low
- Crude oil's declining trend continued to touch below $30 a barrel mark, lowest since 2004.
- While Brent crude fell to $29.96 - a 12 year low, US crude fell to $29.93 - last seen in December 2003.
- Even Brent futures are down to below $30 mark due to the higher than expected increase in the inventory of diesel and gasoline in the US.
A free fall of prices
Gobal crude oil prices including Brent (North Sea) crude oil which serves as a major benchmark for oil, have fallen from $110 a barrel in June 2014 to a 12 year low of around $30 a barrel on 13 January 2016.
Rising production creates a glut
- The fundamental reason for the decline in prices is the oversupply in the global markets, as increasing production is pumping up the stockpiles and easing prices.
- US inventories are at an eight decade high.
- The OPEC (Organization of the Petroleum Exporting Countries) is shying away from cutting production, for fear losing its market share.
- The economic slowdown in China is also pulling down prices.
Factors to watch out for
- The possible lifting of sanctions against Iran will add to the global glut as Iran will start pumping 500,000 barrels/day which will increase to 1 million barrels/day within 6 months.
- Meanwhile, Standard Chartered has warned that oil prices may fall to $10/barrel triggering OPEC to call an emergency meeting to discuss cuts in production.
- Volatility in the global economy will also affect prices.
Implications for the world
- Oil export dependent nations including Saudi Arabia, Russia and UAE are feeling the maximum pressure, with shrinking revenues forcing their governments to cut spending.
- Oil companies are seeing their margins squeezed and firms including ONGC and L&T are cutting back on exploration.
- Global consumers, on the other hand, are enjoying low prices and more disposable incomes.
- Oil importing nations have benefited the most.
Implications for India
- India, which imports 80% of its oil and gas requirements, will save more than ₹2 lakh crore in import bills.
- The lower petroleum subsidies and deregulation of diesel prices has helped government to clean up its balance sheet.
- The prices for consumers have come down by only 15% for petrol and 20% for diesel, primarily because of rupee depreciation and rise in excise duty.
Excise duty boosting revenues
The Indian government is expected to garner ₹10,000 crore through the 3 excise duty hikes on petrol and diesel in the FY 2015-16 to meet its fiscal deficit.
Saudi, Russia to freeze oil output
- Saudi Arabia and Russia agreed to freeze oil output in the first coordinated move by the world's two largest producers.
- Saudi Arabia's Oil Minister Ali al-Naimi said an output freeze by the world's major producers would help stabilize the market.
- The deal was reached at a meeting in Doha along with Qatar and Venezuela.
- Oil prices rose to $33/barrel after the deal was announced.
Iran snubs Saudi, refuses to freeze oil output
- Iran snubbed a proposal agreed to between Russia and Saudi Arabia to cap global crude output to stabilize the falling crude prices.
- Mahdi Asali, Iran's OPEC envoy, said his country will keep increasing its crude exports until it reaches levels attained before international sanctions.
- Venezuela has also joined Russia, Saudi Arabia and Qatar in conditionally agreeing to cap their output.
Oil prices to recover by 2017: IEA
- World oil prices are unlikely to rise from current levels before 2017, according to data provided by the International Energy Agency.
- The IEA's view is that supply will eventually be curtailed as investment cuts prompted by low prices translate into lower output.
- It added that the demand for oil will continue to increase, but at a weaker pace amid financial market turmoil.
Saudi makes U-turn on oil-cut proposal
- Saudi Arabia's Petroleum Minister Ali al-Naimi said the country would not rescue the industry from low prices by cutting its crude oil production.
- He added that the earlier prices of above $100 a barrel encouraged inefficient producers to increase output, and their output needed to be curbed first.
- However, he said Saudi will continue to work with other oil states to stabilize production rates.