The recent surge in Brent crude oil prices has drawn much attention. Surpassing the USD 60 per barrel mark for the first time in over a year, this hike in prices is influenced by production cuts by oil-producing nations and expectations of an increase in global demand due to the rollout of the Covid-19 vaccine. The complex relationship between the two major types of crude oil, West Texas Intermediate (WTI) and Brent, and their impact on the global market warrant an in-depth understanding.
Oil Pricing: Understanding the Dynamics
The Organization of the Petroleum Exporting Countries (OPEC) traditionally operates as a price-fixing cartel. With Saudi Arabia taking the lead, exporting approximately 10% of global demand, OPEC has historically influenced prices. Consisting of 13 member countries including Iran, Iraq, Kuwait, UAE, and Venezuela among others, OPEC can bring down prices by increasing oil production or raise prices by cutting production.
Choosing to cut oil production or shut down an oil well is a challenging decision as the costs and complications involved in restarting are high. If one country lowers production, it risks losing market share if other countries do not follow suit. In recent years, cooperating with Russia in the form of OPEC+ has allowed OPEC to have a more significant impact on global prices and supplies.
Reasons for the Current Price Hike
Limited supply and rising demand are the two primary drivers for the present price increase. Top oil-producing nations curtailed their oil production in response to the decline in demand triggered by the Covid-19 pandemic. In addition, the OPEC and Russia’s decision to reduce oil production further propelled the prices.
On the contrary, the production and rollout of Covid-19 vaccines coupled with the increased consumption following last year’s lockdowns have rejuvenated the international crude oil prices.
The Impact on India
The surge in oil prices can potentially have several implications for India. The country’s import bill is likely to increase significantly, inciting a disturbance in its current account deficit. A crude oil price hike of one dollar per year can result in an approximate oil bill increase of around USD 1.6 billion.
India, which imports approximately 80% of its crude oil requirements, is already experiencing a rise in the average price of its crude oil basket. An increase in crude prices could further exacerbate inflationary pressures, limit the space for the monetary policy committee to reduce policy rates further, and impact fiscal health.
However, there might be a silver lining amidst these potential challenges. The surge in oil prices could positively impact the value of Indian oil and gas companies and increase the government’s disinvestment returns from Bharat Petroleum Corporation Limited. Moreover, remittances from the Persian Gulf could potentially see an uptick.
Difference between Brent and WTI
Brent crude oil and West Texas Intermediate (WTI) are sourced from different locations. While Brent originates from the North Sea, between the Shetland Islands and Norway, WTI primarily comes from US oil fields in Texas, Louisiana, and North Dakota.
Both types of oil are relatively light, but WTI is considered ‘sweeter’ due to its lower sulphur content. Brent crude price serves as the international benchmark price for OPEC, while WTI is a benchmark for US oil prices. Since India majorly imports from OPEC countries, Brent serves as a more relevant benchmark for oil prices in India.
The cost of shipping also varies between the two types of oil. Shipping Brent crude is usually cheaper as it is produced near the sea, allowing for immediate loading onto ships. Conversely, WTI is often priced higher due to its landlocked production locations such as Cushing, Oklahoma, where storage facilities are limited.
