Analysis on the outcome of the (Extraordinary) OPEC+ meeting

11 March 2020

Pandemonium prevailed in the oil markets with the outbreak of the coronavirus (COVID-19) which shook the global economy as China cordoned off its economy from the world.

It has been estimated that the outbreak of COVID-19 is to have a major adverse impact on global economic and oil demand forecasts in 2020, particularly for the 1 st and 2 nd quarters of the calendar year. It has been forecasted that global oil demand growth in 2020 will be less than 0.48 million barrel per day (mb/d), from 1.1 mb/d forecasted in December 2019 given the shutdown of factory operations in China, travel restrictions imposed and undertaken which has affected other economic activities around the world.

Continuous fall in oil prices has prompted OPEC and its allies to hold an extraordinary meeting and recalibrate its production cuts for the remainder of the year. OPEC and its allies usually meet twice in a year but given the sharp fall in oil prices the cartel was inclined to intervene and exercise any sort of damage of control before the prices of oil could fall any further than its current levels.

Verdict:OPEC had proposed to cut production by another 1.5 (mb/d) till the end of 2020, which would have effectively led to overall production cuts adding up to 3.6 mb/d or about 3.6% of the total global supplies.

However for the first time in the 3 years since the joint effort undertaken by OPEC and its allies to balance the oil markets by resorting to production cuts, Russia refused to accept the aforementioned deal and the meeting concluded with a no-deal.

It was also decided that the existing 2.1 mb/d of cuts which are being implemented would only be exercised till the end of this month. Theoretically this could allow the OPEC+ group to pump higher oil from 1 st April 2020 onwards as there is no new deal in place.

It would be interesting to see what course of action Russia will take as the Russian government announced it would take its own course of action April onwards.

Chart 1: Movement in Crude oil prices post the implementation of production cuts decided upon during the 177th and 7th OPEC and Non-OPEC meeting (Unit: USD/bbl)

Oil prices have fallen by 31.7% since from the start of the calendar year till date. Outbreak of COVID-19 has shaken the oil market fundamentals depressing the demand prospects of the commodity despite the implementation of the OPEC and Non- OPEC supply induced cuts. Now with Russia pulling out of the deal, oil prices have fallen by 9.4% on an intra-day basis.

Concluding Remarks

Price call

Price of crude oil is to range between USD 40-45/bbl till the situation globally of Coronavirus is contained. There are chances of price to fall even further than USD 40/bbl, April 2020 onwards if the virus was to spread to more countries which will potentially affect demand prospects and also with no-deal taken place with OPEC and its allies there is no formal binding agreement on the level production any of these countries can maintain.

Impact on the Indian economy

Fall in the prices of oil crude oil augurs well for the Indian economy considering the country imports more than 80% of its oil requirements. In the current financial year India has imported 4.5 mb/d (April-January) of crude oil and our import dependency based on consumption has increased to 85% as compared with it being 83.5% a year ago in the same period.

Trade: 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 USD 1.6 billion per annum. Crude oil import bill during FY19 was around USD 112 billion and in the current fiscal is USD 87.7 billion (till January). Thus the fall in crude oil prices will further aid in softening the CAD.

Inflation: : Crude oil and its products have a weight of 10.36% in the WPI. Of this crude oil and natural gas have a weight of 2.41% and mineral oils around 7.95%. With the exception of LPG and kerosene (with combined weight of 0.83%), the rest would be driven by market forces. Therefore, any decrease in the price of crude oil would tend to impact the WPI inflation number commensurately. In case of the CPI the impact of crude oil prices is directly related to the pass through to transportation fuels which has weightage of only 2.39%. Decrease in the crude oil prices will impact the WPI more than the CPI.

Government Revenues:Currently as of 1st March 2020, the government, centre plus states, is collecting around 107% taxes, (Excise Duty and VAT) on the base price of petrol and 69% in the case of diesel.

With the sudden fall in crude oil prices we do not foresee a change in the revenues of the central government but there could be a potential fall in the revenues of the State as taxes are levied on an ad-valorem basis. But on an overall basis even with the softening of the petrol and diesel prices it has been noticed in the past the government does not pass through the impact of the soft crude prices completely to the consumer and will continue to benefit with the oil tax revenues as a whole.

Author:

Madan Sabnavis, Chief Economist

Urvisha H Jagasheth, Research Analyst

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Rachna Gupta, Manager – Training

Mail: rachna.gupta@care-cart.com

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