NEW DELHI :
Global crude oil prices are expected to witness further volatility with the Organization of the Petroleum Exporting Countries (Opec) set for an additional production cut of 1.5 million barrels per day (mbpd), amid the demand slump following the Covid-19 outbreak.
The decision was taken at the 178th (extraordinary) Opec meeting on Thursday under the chairmanship of Algeria’s energy minister Mohamed Arkab. This will be recommended to the eighth Opec+ meeting, which includes Russia, in Vienna on Friday.
The supply cut will have a wide-ranging impact on energy markets, as Opec accounts for around 40% of global production. Oil prices have a major bearing on how consumers such as India manage inflationary and fiscal pressures. Opec accounts for around 83% of India’s total crude oil imports.
“It also agreed to recommend to the eighth Opec and non-Opec ministerial meeting a further adjustment of 1.5 mbpd until 30 June 2020 to be applied pro-rata between Opec (1 mbpd) and non-Opec producing countries (0.5 mbpd) participating in the declaration of cooperation," Opec said. The next ordinary meeting is slated for 9 June.
The production cut by Opec+ may also compromise India’s energy security efforts in the short run. It is the world’s third-largest crude oil buyer, and the fourth-largest LNG importer.
Every dollar per barrel increases India’s import bill by ₹10,700 crore on an annualized basis. India, which spent $111.9 billion on oil imports in FY19, is a key Asian refining hub with an installed capacity of more than 249.4 million tonnes per annum (mtpa) through 23 refineries.
On 12 February, Opec had revised its outlook for global oil demand growth downward to 0.99 mbpd for 2020, with the Covid-19 outbreak in China accounting “for most of the downward revision".
The growth concerns are also triggering worries about a possible recession along the lines of the 2008 global financial crisis. Battling a severe slowdown, India has been imploring Opec not to effect deeper crude oil production cuts. Retail prices of petrol and diesel in India track global prices, not crude, but are broadly linked to crude oil price trends.
Global crude prices have been on a downward spiral since December. International benchmark Brent crude was trading at $51.33 per barrel, far lower than the highs of $147 per barrel in July 2008.
According to the Opec Monthly Oil Market Report, the demand was lowered by 0.23 mbpd. Concerned about the situation, its technical panel recommended a provisional cut to the Opec+ arrangement. Also, the Paris-based International Energy Agency has cut global oil demand growth outlook.
“The Covid-19 outbreak has had a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the first and second quarters. Global oil demand growth in 2020 is now forecast to be 0.48 mbpd, down from 1.1 mbpd in December 2019. Moreover, the unprecedented situation and the ever-shifting market dynamics means risks are skewed to the downside," Opec said.
The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, averaged $65.52 in December 2019, according to data from the Petroleum Planning and Analysis Cell. The price was $51.17 a barrel on 4 March. The Indian basket represents the average of Oman, Dubai and Brent crude.
“The conference noted that the further impact of the Covid-19 outbreak on oil market fundamentals necessitates further continuous monitoring," it said.