Crude oil prices fell below $70, marking a new 52-week low on September 10 due to oversupply concerns and a weak demand outlook. A week ago, OPEC+ announced it would postpone its planned oil supply increase until the start of 2025.
OPEC, or the Organization of the Petroleum Exporting Countries, was established in 1960 by Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. The organization has since grown to include 13 member nations. OPEC operates like a cartel, regularly meeting to set oil production targets and coordinate output to manage global oil prices.
In 2016, in response to falling oil prices driven by a surge in United States crude production—also known as shale oil—OPEC signed an agreement with 10 other oil-producing countries, forming OPEC+. Among these countries was Russia, the world’s third-largest oil producer accounting for more than 10% of global production.
This week’s Chart of the Week looks at the reasons behind falling crude oil prices and how these trends may affect India and its equity markets.
Weak demand in the US & China and an increasing supply of US crude led to decline in crude prices
US increases crude production to all-time high levels, while OPEC+ cuts
Oil posted its biggest weekly drop in 11 months as a weak US jobs report added to concerns about tepid demand in the world’s largest consumer of crude. Oil prices have trended lower since early July, with weakness in the economies of China and the US — the top two oil consumers — creating fears about demand.
According to U.S. Energy, the production of crude oil in the United States, also known as shale oil has steadily risen in recent years to all-time high levels, adding supply pressure and messing up OPEC’s calculations as oil demand weakens.
Falling crude oil prices a boost for the Indian economy
India imports more than 80% of its crude oil needs, so falling oil prices will significantly reduce the country's import bill. This will help narrow the trade deficit and boost foreign exchange reserves.
High oil prices typically lead to a stronger US dollar against other currencies, which puts downward pressure on the Indian rupee. This is because high oil prices drive up demand for dollars as it is the preferred currency used in oil trade across the globe–so much so that it is referred to as the petrodollar trade. So falling crude oil prices can alleviate the pressure on the rupee.
According to India Today, the government is considering lowering oil prices to reduce inflation by bringing down energy costs. High retail prices for petrol and diesel tend to drive up domestic commodity prices, as increased oil costs raise production and transportation expenses across various sectors, squeezing profit margins. As the world's fourth-largest energy consumer, behind China, the US, and the European Union, India is especially sensitive to shifts in global oil prices.
Indian oil marketing companies & airlines would directly benefit from lower crude oil prices
Oil marketing and distribution companies such as Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation stand to benefit from falling crude oil prices, as it is a key input material. Despite crude price fluctuations, retail fuel prices have remained near Rs 100 for the past few years. As a result, declining crude prices, coupled with stable retail prices, will significantly enhance their profit margins.
These companies saw their net profit surge nearly tenfold during the Russia-Ukraine war. This was due to US sanctions on Russian crude, which left Russia with limited buyers and forced it to sell at discounted rates. Consequently, India's crude imports from Russia skyrocketed, increasing from $2.3 billion in 2021 to $25.5 billion in 2022, and nearly doubling again to $48.6 billion in 2023.
Although Russia still supplies 40% of India’s crude oil, the price advantage has lessened due to higher insurance and freight costs.
Similarly, for airlines like InterGlobe Aviation (IndiGo), fuel expenses make up more than 30% of its total expenses. Lower crude oil prices can help reduce operating costs and boost profit margins.
Paint, tyre and lubricant manufacturers that use crude oil derivatives as raw materials would witness higher gross profit
Paint manufacturers such as Asian Paints, Berger Paints (India), and Kansai Nerolac Paints will benefit from lower crude oil prices, as more than 40% of their revenue is spent on raw materials, many of which are crude oil derivatives. Gulf Oil Lubricants India will also see a reduction in operating costs in the coming quarters if crude oil prices remain low.
On the other hand, rubber prices have risen by 24% over the past year, squeezing profit margins for tyre manufacturers. Companies like Balkrishna Industries, MRF, Apollo Tyres, and Ceat have taken price hikes over the past year to offset rising costs. However, as the prices of crude oil derivatives decline with falling oil prices, rubber costs are expected to decrease, which will, in turn, benefit these tyre manufacturers.
The recent decline in crude oil prices offers significant advantages to various sectors in India. Overall, crude oil prices at or below $70, is good for the Indian economy. However, global economic dynamics, particularly demand trends in the US and China, will be critical in shaping the long-term outlook for crude prices and their impact on India.
