Crude oil at 3 year low

In September, the crude oil prices fell to a 3-year low - the news is sending ripples across global markets. For a country like India, which is heavily dependent on oil imports, there are positives and negatives (for some sectors) with the falling oil prices. In this article, we look into the reasons behind the sharp fall in crude oil prices and its broad-ranging effects on the Indian economy, industries, and consumers.

Dip in Crude Oil rates

Since December 2021, Brent crude fell below $70 a barrel last week for the first time. Last week, Brent crude futures were down $2.33, or 3.24%, at stood at $69.51 a barrel. US West Texas Intermediate crude lost $2.50, or 3.64%t, to $66.21.

Reasons behind the dip in crude oil rate

Here are some of the reasons for the fall in crude oil prices:

• The Organization of the Petroleum Exporting Countries (OPEC) in a monthly report said world oil demand will rise by 2.03 million barrels per day (bpd) in 2024. It is lower than what the OPEC projected in last month's forecast where it said the growth would be 2.11 million bpd.
• OPEC also cut its 2025 global demand growth estimate to 1.74 million bpd from 1.78 million bpd. Prices slid on the weakening global demand prospects and expectations of oil oversupply.
• Another reason was data released by China. It showed consumer inflation accelerated in August to its fastest in half a year, though domestic demand remained fragile, and producer price deflation worsened. Increased inflation indicates a slowing economy. As China's economy slows, its demand for energy, including crude oil, will decrease. Since China is one of the biggest consumers of the world's crude oil, the reduced demand from there can lead to lower oil prices.

Impact on Indian commodity markets due to dip in crude oil rates

If the crude oil prices stay at these levels, it will have a direct and indirect impact on the Indian commodity market. Let us look at the major effects in detail:

Direct Impact: Indian commodity markets heavily rely on petroleum products like gasoline, diesel, and kerosene. A decline in crude oil prices can lead to lower prices for these products, impacting sectors such as transportation, manufacturing, and agriculture (more in the next section).

Indirect Impact: These impacts are much wider from inflation to the equity market. Let us look at the indirect effect in detail.

• Inflation: Lower crude oil prices can help reduce inflation as it reduces the cost of essential goods and services. It can have a positive impact on consumer spending and overall economic growth.
• Currency Exchange Rates: A decline in crude oil prices can strengthen the Indian rupee against the US dollar, as India is a net oil importer. It can make imports cheaper and boost exports, benefiting various sectors of the economy.
• Stock Market: Lower crude oil prices can positively impact the stock market, particularly for sectors that are sensitive to fuel costs, such as transportation and manufacturing.

Impact on different sectors due to decreased crude oil rate

The reduced crude oil prices will impact the different sectors in India and the overall economy. Here are some of the key sectors that may see a significant impact:

• Manufacturing: Lower oil prices can reduce production costs for manufacturers that rely on petroleum-based products. It can make manufacturers more competitive in both domestic and international markets.
• Energy Sector: Lower oil prices can negatively impact the profitability of oil and gas producers. The relative cost advantage of renewable energy sources may increase, potentially accelerating their adoption.
• Transportation/Aviation: The aviation sector will benefit the most from reduced fuel costs, as Aviation Turbine Fuel (ATF) accounts for a major portion of operational expenses. Airlines may see an improvement in profitability, and consumers could benefit from lower ticket prices.
• Paint Industry: Petroleum-based products are used as solvents and binders in many paints. When oil prices decline, the cost of these raw materials decreases, leading to lower production costs for paint manufacturers. This, in turn, can result in lower prices for consumers or increased profit margins for paint companies.

What's the future of Crude Oil?

As per analysts, the global crude oil prices will not remain below $70 a barrel for long. Morgan Stanley has cut its Brent crude oil forecasts for coming quarters and said the global oil market is facing a period of demand weakness similar to those seen during recessions. Overall, the crude oil prices are expected to remain volatile in the next few months.

Conclusion

The decline in crude oil prices to a three-year low has wide-ranging implications for the global and Indian economies. While oil-exporting nations may face challenges, oil-importing countries like India stand to benefit significantly through lower import bills, reduced inflation, and improved economic growth prospects. However, the long-term impacts on renewable energy investments, fiscal policies, and global geopolitical dynamics remain to be seen as the world continues to adjust to shifting energy markets.