It is a very well-established fact that Islamic countries have gathered huge wealth by selling oil to the world. Crude oil is a very important commodity that drives the financial and economic fronts of all the countries around the world.
Crude oil is defined as a naturally occurring fossil fuel that is further refined by the process of fractional distillation to yield different liquids and gases so as to obtain- petrol, diesel, kerosene, petroleum jelly, etc. Many countries possessing oil wells have become rich post the Industrial revolution by selling oil to others.
Crude Oil is sold in barrels. 1 oil barrel is equivalent to 42US Gallon or 159 liters. It was officially adopted by the Petroleum Producers Association in 1872 and the U.S. Geological Survey and the U.S. Bureau of Mines in 1882.
Owing to the impact of COVID-19, industries all over the world received a massive jaw-dropping blow to their transportation, manufacturing, and production processes. Seeing the contagious nature of this deadly disease, governments have been forced to order the complete lockdown of their territories. Thus, there has been a considerable reduction in demand for crude oil everywhere. The effect was so grave that the per barrel oil price of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 a barrel on 20th April, 2020. Likewise, the Brent crude oil prices also fell below to as low as USD 16, on 22nd April-2020
This means oil producing companies would pay the buyer to purchase the oil from them in order to curtail upon their storage and operational expenses. They have started to take tankers on rent to store the surplus produce.
India is also under the brunt of lockdown. Its economy has been severely hit. There is a massive blow to the agricultural, real estate, automotive, and manufacturing industries. India is not a self-sufficient nation when it comes to oil production. Each year it spends millions in US Dollars to satiate its demand for crude oil. Based upon the available in Indian government website I have tried to summarize the import of crude oil in India in the below-mentioned table-
As can be seen price per barrel has been increasing consistently from the FY 2016-17 until FY 2019-20. Also, there has been a considerable increase in demand in the demand for petroleum products. However, this increase in demand is not consistent as the rate of increase is falling in each successive financial year when compared to the previous financial year’s demand.
So, keeping these two factors in mind i.e., COVID-19 and successive decrease in rate od consumption of petroleum products in each financial year, we have considered the present year’s import demand falls by 30%. The import will thus be reduced to 1062.604 million barrels at an average rate of USD 45/ barrel. The point to be given attention is the relative strength of INR against USD. If the INR gains strength India will be able to reap huge benefits.
Based upon these speculated figures India will be able to save at least 47% of its forex reserve in USD which even in the worst-case scenario is not expected to fall below 30% of the preceding financial year i.e. 2019-2020.
Even if there is a relief in the lockdown it is almost certain by the present situation things are expected to return to normalcy, not before August, 2020 across the world. Hence, the consumption and consequently the crude oil prices are expected not to rise anytime high beyond USD 45.
Hence, to capitalize upon the given opportunity, India also needs to purchase this crude oil at low prices and fill its Strategic Petroleum Reserves (SPR) about which we will discuss in our next post.