Crude Prices May Fall Further Over COVID-19 Concerns

March 9, Mumbai:The outbreak of COVID-19 is expected to have a major impact especially in the crude oil market. As per the Organisation of the Petroleum Exporting Countries’ (OPEC’s) 178th Meeting, the outbreak would have major adverse impact on global economy and oil demand forecasts, especially for the first two quarters of the current calendar year 2020. “Global oil demand growth in 2020 is now forecast to be 0.48 million barrel per day (mb/d), down from 1.1 mb/d in December 2019. Moreover, the unprecedented situation, and the ever-shifting market dynamics, means risks are skewed to the downside,” says HE Mohamed Arkab, Minister of Energy of Algeria and Head of its Delegation. 

The price of crude oil may range between $40-45/bbl till the situation globally of coronavirus is contained points out a research report by CARE ratings analysis on the outcome of the OPEC meeting. The agency also believes that there are chances of price to fall even further than $40/bbl from April 2020 onward, if the virus was to spread to more countries resulting in affecting demand prospects. 

“We assume at the macro level, with imports of 1651 million (4.5*366) barrels of crude oil in FY20 (till January) a dollar decrease in prices on a permanent basis would decrease the bill by roughly $1.6 billion per annum. Crude oil import bill during FY19 was around $112 billion and in the current fiscal is $87.7 billion (till January). Thus the fall in crude oil prices will further aid in softening the current account deficit (CAD),” says CARE Ratings report. 

The Kotak Institutional Equities, in one of its research notes, claims that the sharp decline in global crude oil prices over the past few weeks is a positive for India. “A $5/bbl change in oil prices for the full year will theoretically impact India’s CAD by $7-8 billion (25 bps of GDP) is our current CAD/BoP estimates for FY2020-21E,” points out the Kotak. Further, market experts believe that the ongoing tensions between OPEC+ members as well as the decision of Saudi Arabia to ramp up the production will reduce the oil prices further. On March 9, 2020, the crude oil prices plunged to about $30 a barrel, a drop of 30 per cent on the back of a 3-year pact between OPEC and Russia ended, fuelling panic that triggered this biggest fall in nearly 30 years.