India is worried over the move by the OPEC and its allies to cut oil production to shore up prices, because it might dash its hope for significant savings on its energy import bill.
The OPEC (Organization of Petroleum Exporting Countries) and some other major oil producing nations – together commonly known as the OPEC Plus – have moved closer to clinching a deal to slash output to arrest steep decline in prices due to the price war between Saudi Arabia and Russia as well as fall in demand caused by transport restrictions and lockdowns imposed around the world to stop the spread of the COVID-19 virus.
The move, however, put Prime Minister Narendra Modi’s government in New Delhi on tenterhooks, as it might belie its hope for a substantially lower energy import bill would allow it to spend more to deal with the pandemic and help recover the economy ravaged by the crisis.
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Petroleum Minister Dharmendra Pradhan put forward New Delhi’s argument for a stable oil market, as he joined his counterparts from the other G20 nations for an extraordinary video-conference on Friday.
He “appreciated the efforts of (the) OPEC and (the) OPEC+ to balance supply-side factors”, but also “advocated for a stable oil market” and stressed “the need for targeting oil prices at affordable levels to allow for a consumption-led demand recovery”.
New Delhi has been underlining during its engagements with the United States, Russia, Saudi Arabia, United Arab Emirates and other major petroleum exporting nations over the past couple of weeks that ensuring availability of crude at affordable prices would be the key to the recovery of the world economy.
India has been arguing that the while less volatility in the international market would help all stakeholders; the oil prices should be both reasonable for the producers and affordable for the consumers, more so with the world facing a crisis, sources in New Delhi told the DH.
The Reserve Bank of India (RBI) in its Monetary Policy Report for April 2020 noted that India’s oil import bill was expected to decline in March 2020 with a steep fall in crude oil prices. “The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade,” the central bank predicted, albeit with a note of caution that the gain was “not expected to offset the drag from the shutdown and loss of external demand”.
“Given the current demand-supply assessment, the baseline scenario assumes crude oil prices (Indian Basket) to average around US $ 35 per barrel during 2020-21,” the RBI said in the report released earlier this week.
But the prices are expected to go up, once the deal, which the OPEC Plus is working on, is clinched.
“Reiterated to my counterparts at the #G20 Energy Ministers’ Summit Hon. PM @narendramodi’s appeal of not letting a purely economic agenda define globalization,” Pradhan posted on Twitter on Friday.
Reiterated to my counterparts at the #G20 Energy Ministers Summit Hon. PM @narendramodi’s appeal of not letting a purely economic agenda define globalization.
Our sheer determination will help us emerge victorious against this invisible enemy. pic.twitter.com/427gFpORxC
— Dharmendra Pradhan (@dpradhanbjp) April 10, 2020
Modi told the other G20 leaders during a virtual summit on the COVID-19 that the “well-being of humankind” should be at the centre of the vision for global prosperity. He also reiterated it during his discussion on COVID-19 pandemic over phone with several other foreign leaders over the past few weeks too.
The energy ministers of the G20 nations had the video-conference a day after the OPEC Plus nations reached closer to an agreement to slash global production by 10 million barrels per day (bpd) in May and June, followed by a cut of eight million bpd from July to December and by six million bpd for the next 16 months till April 30, 2022.
The negotiations among the OPEC Plus nations came close to a breakthrough on Thursday, when Russia and Saudi Arabia agreed to bury differences and end the price war. The only holdout was Mexico, which was ready to slash its output by 100000 bpd although the rest of the OPEC Plus wanted it to agree to cut 400000 bpd. The United States, however, later agreed to make up for the shortfall to clear the way for the deal.
“Should the Indian basket of crude oil prices increase by 10 per cent above the baseline assumption, inflation could be higher by 20 bps and growth could be weaker by around 15 bps,” the RBI pointed out. “If COVID-19 were to persist longer, global economic activity and demand for crude oil could fall further in an environment of sustained oversupply due to Saudi Arabia’s decision to enhance production. Should the Indian basket crude price fall by 10 per cent vis-à-vis the baseline, inflation could ease by up to 20 bps and growth higher by up to 15 bps, depending upon the extent of pass-through to domestic product prices.”
The oil prices have been in free fall since early March, when Saudi Arabia and Russia got into a price war and flooded the international market with crude. The lockdown and the transport curbs to contain the pandemic resulted in a massive drop in the demand for energy in many nations, further lowering prices. The oil producing nations have been desperately seeking a deal to cut production in order to arrest the fall in prices and save the industry.
The international crude oil prices (Indian basket) fluctuated in a wide range since October 2019. The prices initially increased during late December 2019 and early January to around $ 70 per barrel, triggered by the US-Iran tensions, but subsequently came down to reach $ 51 by early March in anticipation of lower global demand following the outbreak of COVID-19 and its rapid geographical spread. Brent prices crashed to $ 32 on March 9 following Saudi Arabia’s decision to cut prices and increase production over the failure to reach an agreement with Russia on production cuts. Brent prices fell further to $ 23 on March 30, while the US crude prices dipped briefly below $ 20. Brent rebounded to $ 34 per barrel on April 3, the central bank noted in its latest Monetary Policy Report.
