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Oil climbed to $77.16 a barrel on 5 July, its highest in nearly three years, and was trading at $75.65 a barrel on Wednesday as a result of a deadlock over the United Arab Emirates’ (UAE’s) production quota. How will this impasse affect India? Mint decodes:

What is the origin of the deadlock?

In April 2020, the Organization of the Petroleum Exporting Countries and its allies (Opec+) entered into a two-year agreement for steep cuts in crude oil production to manage the sharp fall in crude oil prices. The price of Brent crude had that month fallen to an 18-year low of under $20 per barrel as the world went into lockdown to contain the covid-19 pandemic. In November 2020, the price of Brent crude began rising as countries began rolling out vaccination drives. But Opec+ maintained lower levels of production with Saudi Arabia announcing a further cut in production of 1 million barrels per day for the February-April period.

Why is there an impasse?

According to the Emirates News Agency, the UAE believes that the market needs to augment production and supports an increase from August. But the Opec joint ministerial monitoring committee (JMMC) has put forth the option of increasing production on the condition of an extension to the current agreement, which would extend the UAE’s reference production baseline till December 2022, from the existing agreement end date of April 2022. While the UAE proposed to decouple the matters of increasing production and the extension of the agreement, the JMMC insisted on coupling them, leading to a stalemate.

Production cut
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Production cut

Does the market need more crude oil?

As countries lift curbs, the markets need greater oil supply. According to S&P Global Platts Analytics, with global demand set to grow by 4.2 million barrels per day by August, the lack of a deal could cause more tightness than expected in August. On the other hand, a near-term compromise would provide the market with greater supply in August and September.

How will this impact fuel prices in India?

If the UAE and Opec+ fail to reach an agreement to increase production in August, India’s hope of relief from a possible decline in crude prices could be delayed. Indian consumers are currently facing record-high prices of petrol and diesel, with retail fuel prices crossing the 100 per litre mark in many states and Union territories, including the national capital and most major metros. Higher crude prices may lead fuel prices to rise further, stoking inflation in addition to impacting consumption.

How much does India import from Opec+?

India is the world’s third-largest crude oil buyer and the fourth-largest LNG importer. Opec+ makes up about 83% of India’s oil imports. In 2019-20, it imported 227 million tonnes of crude oil. India has its own basket of crude suitable to its refineries, which comprises the Oman, Dubai and Brent crude. The country’s import bill stood at 5.42 trillion in 2016-17 and increased to 8.43 trillion in 2019-20. Every dollar increase in the price of crude raises India’s import bill by 10,700 crore on an annualized basis.

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