Explained: Why crude oil prices are falling and how it will impact fuel prices in India


The price of Brent crude has fallen under $63 per barrel from a high of $70 per barrel in early March on the back of growing fears about a fall in demand due to new travel restrictions to combat a resurgence in Covid-19 infections and increasing crude oil supply. We examine the recent trend in crude oil prices and its impact on India.

Why are crude oil prices falling now?

A recent resurgence in Covid-19 infections coupled with a decision by OPEC+ (a keep producers’ block) to increase crude oil production has contributed to a fall in crude oil prices. OPEC+ has announced a phased withdrawal of production cuts which would see total crude oil production by the group of countries rise by 1.1 million barrels per day by July.

Recent US data has also indicated that gasoline inventories are rising faster than the fall in crude oil inventories raising concerns of waning demand for petroleum products. US crude oil production capacity has recovered to about 11 million barrels per day after abnormally cold weather in February forced US crude oil output down to 9.7 million barrels per day.

Experts noted that the recovery in supply without a similar recovery in demand has contributed to the recent correction in crude oil prices and that supply cuts were difficult to maintain for oil-producing countries given the global macroeconomic situation.

“Supply discipline is difficult to manage in a macroeconomic backdrop where even oil-producing countries are facing fiscal constraints,” said Vivekanand Subbaraman, analyst at Ambit Capital adding that he expected crude oil to remain range-bound to between $60-$65 per barrel in the near term.

Hopes of increasing demand due to lower restrictions and accelerated vaccine administration programs around the world had pushed crude oil prices up from about $40 in October to $70 in early March. Key oil-producing countries also maintained production cuts imposed early in FY21 to keep crude oil prices elevated with Saudi Arabia even cutting crude oil production further to boost crude oil prices. A fall in US crude oil production also contributed to keeping global prices elevated. India had also called on oil-producing countries to withdraw production cuts stating that high crude oil prices were slowing the economic recovery in developing economies.

How is this impacting India?

The fall in international crude prices has reversed a six-month trend of rising auto fuel prices which saw the prices of petrol and diesel hit all-time highs across the country. Oil marketing companies have lowered the price of petrol and diesel by about 60 paise per litre since March 23 when the oil marketing companies cut prices after a 24-day halt in daily price revisions as elections were looming in a number of states.

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The price of petrol has remained stable at Rs 90.56 per litre and that of petrol has remained unchanged at Rs 80.87 per litre in the national capital for nine days.


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