The recent dip in international crude oil prices has broken the six-month trend of surging auto fuel prices, which led to record highs for petrol and diesel prices nationwide. The cost per barrel of Brent crude dropped below USD 63, down from an early March 2021 high point of USD 70. Key factors in this market include crude oils such as West Texas Intermediate (WTI) and Brent, which are either traded on their own or influence pricing of other types of oil.
Oil Pricing: Role of OPEC+
Generally, the Organization of the Petroleum Exporting Countries (OPEC), driven by Saudi Arabia (the world’s top crude oil exporter, responsible for fulfilling 10% of global demand) functions as a cartel, setting prices within a beneficial range. Thirteen countries – Iran, Iraq, Kuwait, UAE, Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela – comprise OPEC’s membership.
OPEC has the ability to reduce prices by increasing production, and vice versa. Global oil pricing largely depends on the cooperation between global oil exporters, rather than competitive dynamics. However, decisions about reducing or halting production are major ones, since resuming production can be highly expensive and complex.
OPEC has recently been working with Russia under the name “OPEC+” to regulate global prices and supply. In 2016, OPEC partnered with top non-OPEC oil-exporting nations to establish an even stronger entity termed OPEC+ or OPEC Plus.
Factors Behind the Fall
The resurgence of Covid-19 infections and OPEC+’s decision to raise crude oil production have both factored into the falling oil prices. OPEC+ plans on gradually moving away from production cuts, aiming to boost total crude oil production by 1.1 million barrels daily by July 2021.
Recovery in supply without a corresponding demand recovery has led to the recent correction in crude oil prices. The challenge of maintaining supply cuts for oil-producing nations considering the current global macroeconomic climate has also contributed.
Impact on India’s Economy
The decrease in oil prices will diminish the country’s imports bill, thus reducing its current account deficit. It is estimated that a one-dollar increase in crude oil price raises the oil bill by around USD 1.6 billion annually. India imports approximately 80% of its crude oil needs.
Furthermore, the drop in crude prices may alleviate inflationary pressures that have been mounting up over the past few months, potentially enabling the monetary policy committee to further ease policy rates.
Differences Between Brent and West Texas Intermediate (WTI)
Brent crude oil originates from oil fields between the Shetland Islands and Norway in the North Sea, while WTI is primarily sourced from US oil fields in Texas, Louisiana, and North Dakota. Both oils are relatively light, but Brent has marginally higher API gravity, making WTI lighter. WTI’s lower sulphur content (0.24% compared to 0.37% for Brent) earns it the “sweeter” descriptor.
Brent’s crude price serves as OPEC’s international benchmark price, while WTI’s crude price is used as the benchmark for US oil prices. Given India’s primary importation from OPEC nations, Brent oil pricing is the benchmark for India. Shipping costs for Brent crude are typically lower due to its proximity to the sea for easier transportation, while landlocked WTI incurs higher shipping costs given limited storage facilities in places such as Cushing, Oklahoma.
