Monday, March 28, 2016

Crude Oil - Impact of Fall in prices in Indian Economy – Falling Prices impact Favourable OR Adverse

क्रूड ऑयल, कीमतें घटने का कहां पड़ता है असर - कच्चे तेल की कीमतों में गिरावट से सिर्फ फायदा नहीं

Crude oil Prices
Crude Oil is a commodity whose prices are governed globally. Economy of various countries is solely dependent on the price movement of crude oil. The rise and fall in the prices of crude oil impacts the lively hood of common man. This not only impacts the GDP growth of the country but for some of the countries particularly the Gulf countries this is the only source of Income for the country. On an average 924 lacs Barrel Crude oil is consumed globally of which share of consumption by the countries such as China, America, Japan and our country India is more. India ranks among the top 10 largest oil-consuming countries. India faces a large supply deficit; it imports about 70% of its total oil consumption and makes no exports. The oil reserves of the country are located primarily in Mumbai High, Upper Assam, Cambay, and the Krishna-Godavari and Cauvery basins. Crude oil plays a vital role in the Global Economy.
What is Crude Oil
Naturally available raw oil is known as Crude Oil. It is a Black coloured thick viscous fluid. It is a type of Dark Hydrocarbon matter found globally beneath the earth surface and/or sea available since past 30 crore years. It takes minimum 20 gallon gasoline to prepare one Barrel. Crude oil measurement is done in Barrels and one Barrel is equivalent to 159 litres.
1 US barrel = 42 US gallons. 
1 US barrel = 158.98 litres. 1 Gallon = 3.79 litres
1 tonne = 7.33 barrels. 
1 short tonne = 6.65 barrels. 
Note: barrels per tonne vary from origin to origin.

The Processing / Refining of crude oil is done in Oil Refinery through Fractional Distillation and we get by-products such as  Kerosene, Petrol, Diesel, Natural Gas, Vaseline, Lubricants
Types of Crude Oil
Crude Oil is of three types – Brent Crude, WTI. and Shale oil. Brent Crude is traded in London-UK and WTI  and Shale oil in USA. In India Brent crude oil is imported. In India Trading of Brent Crude is done.
Brent Crude
Brent Crude oil, extracted from the North Sea, is a sweet light crude oil with less than 0.4% of sulphur and an API gravity of 30 °API. It is light because of its relatively low density, and sweet because of its low sulphur content. In fact these are the two main characteristics by which crude oil are classified-sulphur content and density-which the petroleum industry measures by its American Petroleum Institute (API) gravity. Brent Crude is a mix of crude oil from 15 different oil fields in the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. The Brent Crude benchmark is known as the Brent Blend, London Brent, or Brent petroleum. 
Brent is the leading global price benchmark for Atlantic basin crude oils. Originally, Brent Crude was produced from the Brent oilfield. The name ‘Brent’ comes from the naming policy of Shell UK Exploration and Production, which originally named all its fields after birds (in this case the Brent goose). 
West Texas Intermediate (WTI)
West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.It is the underlying commodity of New York Mercantile Exchange's oil futures contracts.
The price of WTI is often referenced in news reports on oil prices, alongside the price of Brent crude from the North Sea. Other important oil markers include the Dubai Crude, Oman Crude, Urals oil and the OPEC Reference Basket. WTI is lighter and sweeter than Brent, and considerably lighter and sweeter than Dubai or Oman. WTI is used in making low sulfur gasoline and low-sulphur diesel.

Crude Oil Production - Millions of barrels per day(MBD)
S. No.
Saudi Arabia
OPEC countries combined together have 40% plus share approx 63% in Global Oil Production.
Source: US Energy Information Administration; Data includes crude oil, lease condensate, natural gas plant liquids, and refinery processing gain; Updated Feb. 11, 2016.
Given the high volatility in oil prices, risk management techniques are of utmost importance for market participants, such as producers, marketers, processors, and industries. Amidst uncertainty, modern techniques and strategies, including market-based risk management financial instruments like ‘Brent Crude Oil Futures’, offered on the MCX platform can improve efficiencies and consolidate competitiveness through price risk management.
A third type of Oil is Shale Oil - Difference between Oil Shale, Shale Oil & Shale Gas:-

  1. Shale gas: It is basically natural gas which is extracted by the process of fracking. Countries like USA and China are using this method.
  2. Oil Shale: Oil shale is the raw material for producing Shale Oil. It is organic rich rock from which shale oil is extracted.

  1. 3. Shale OilShale oil is the oil produced from oil shale. It is a substitute for conventional crude oil. There has been a tremendous increase in the shale oil production in the recent years. It causes land pollution.
    For Details Please click on following Link: What are shale oil, shale gas and oil shale? and What is Shale Gas?

What is OPEC

Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 13 petroleum-exporting nations, founded in 1960 by the first five members, and headquartered since 1965 in ViennaAustria. The 13 countries account for 40 percent of global oil production and 73 percent of the world's "proven" oil reserves, making OPEC a major influence on global oil prices.
OPEC's stated mission is "to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry." 
OPEC's members are Algeria, Angola,Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia         (the de facto leader), United Arab Emirates, and Venezuela. Two-thirds of OPEC's oil production and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf.
The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply.

·         OPEC output and supply.
·   Terrorism, weather, war and any other unforeseen geopolitical factors that causes supply disruptions.
·         Global demand particularly from emerging nations.
·         Dollar fluctuations.
Much of the economy depends on oil. This is why prices of oil matter to almost every economy. Global crude oil prices are down nearly by 60% this year to $40 per barrel-levels from $110 / barrel at the start of the year. This has caused a crisis in countries like Russia, which depends on oil exports.
India is the IVth largest country to import crude oil. Around 35 lakh Barrels per day consumption is estimated for India. India’s growth story hovers around the import of oil as India imports 80% of its crude requirements. Any negative change in the crude oil price has an immediate positive impact on the increment in the GDP and IIP. A one-dollar fall in the price of oil saves the country about 40 billion rupees. Oil is one of the most important commodities in recent times.
Fall in Oil prices affect India in following ways:
Current account balance:
India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, according to a report by Live mint. This amounts to nearly 0.43% of the Gross Domestic Product - a measure of the size of the economy.
Increases price of Goods and services ie. Rail, Road and Air Fares. Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies - directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%, according to a Money control report. The fall in Inflation leads to reduced Transportation costs which in turn will lower price of Air, Railway and Bus fares. It also helps in reducing the prices of consumer durables, fruits and vegetables etc. The prices of paints, plastics, fertilisers, shipping etc. will also come down.
Oil subsidy and fiscal deficit:
Even it affects the PSU Oil Cos. profitability, in case of Diesel Prices which is deregulated,The PSU Cos have to buy more Dollars ($) to pay its Bills.The government fixes the price of fuel at a subsidized rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government's total expenditure and leads to a rise in fiscal deficit - the amount it borrows from the markets. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit. However, since diesel was recently deregulated, the fall in oil prices will likely have less effect on the government's fiscal deficit. Moreover, the government still has to pay for previous under-recoveries. Any benefit from the fall will be offset by payments for the past under-recoveries.
Rupee exchange rate:
The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. The fall in crude oil price is good for all users, including major importers like India, as it lowers their trade deficit and hence strengthens their currencies. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
Petroleum producers:
The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news. Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies. For example, the share prices of Bharti Airtel and Bajaj Auto fell because of the devaluation of the Nigerian currency - Naira. Both the companies have a significant presence in the African country.
Monetory Policy:
The decline in crude oil prices helps the Reserve Bank of India to cut interest rates during the credit policy review and thus helps in Growth of the economy.

Negative effects of Decline in Oil Prices
A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
For the oil exporters, this is bad news as it lowers their export earnings, and given that most countries are dependent on oil exports, their growth would suffer. Domestic consumers might only see a small portion of their income "freed up" as the government's increase of excise duties on diesel and petrol mean that retail prices haven't fallen by as much in India as they have elsewhere.
The decline in the Crude oil prices has brought loss of approx 2 Lac crore to Oil exploration industry. These cos. are at a loss and are not able to meet their cost of production. The Cos. are facing the challenge of reducing their production. If these cos. Are not able to come out of this situation at the earliest they will be facing Bankruptcy like situation. International Energy Agency(IEA)  has warned of economic situations like that of Russia and Venezuela. The  IEA had predicted Crude oil demand at 9 lac BPD in 2015. Decline in crude oil prices means Less Income for the Exporting Country. Since the Decline of Oil prices will affect Global demand in International Market and in turn affect Exports from India

Current Outlook 

With crude oil prices rebounding since February 2016 to around US$ 40.00 per barrel the experts believe that oil prices may not remain at lower level for long and may hover around this level in near future.The OPEC is also making efforts to convince the oil producing countries to limit the output to check at least further fall in oil prices. However, the experts also stated that the oil demand will grow at 12% a year in next 5 years as compared to 17% annual growth during the period 2009-2015. The next meeting of OPEC with Non-OPEC members is scheduled on April 17th 2016 to arrive at a decision to Cap the Oil production limit. In the meantime Iran has also added additional oil supply to the market after the US lifted its sanction on Iran.

- Mcx
- Kotak Mahindra Securities
- ET

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