Why crude oil prices are falling and how

Q. What is the news?

A. 

• The price of Brent crude has fallen under $63 per barrel from a high of $70 per barrel in early March on the back of growing fears about a fall in demand due to new travel restrictions to combat a resurgence in Covid-19 infections and increasing crude oil supply. 

Q. What are the reasons for falling crude oil prices?
A.  

• A recent resurgence in Covid-19 infections coupled with a decision by OPEC+ (a keep producers’ block) to increase crude oil production has contributed to a fall in crude oil prices. 
• OPEC+ has announced a phased withdrawal of production cuts which would see total crude oil production by the group of countries rise by 1.1 million barrels per day by July.
• Recent US data has also indicated that gasoline inventories are rising faster than the fall in crude oil inventories raising concerns of waning demand for petroleum products. US crude oil production capacity has recovered to about 11 million barrels per day after abnormally cold weather in February forced US crude oil output down to 9.7 million barrels per day.
• Experts noted that the recovery in supply without a similar recovery in demand has contributed to the recent correction in crude oil prices and that supply cuts were difficult to maintain for oil-producing countries given the global macroeconomic situation.
• Hopes of increasing demand due to lower restrictions and accelerated vaccine administration programs around the world had pushed crude oil prices up from about $40 in October to $70 in early March. Key oil-producing countries also maintained production cuts imposed early in FY21 to keep crude oil prices elevated with Saudi Arabia even cutting crude oil production further to boost crude oil prices. A fall in US crude oil production also contributed to keeping global prices elevated. India had also called on oil-producing countries to withdraw production cuts stating that high crude oil prices were slowing the economic recovery in developing economies.

Q. What is its Impact in India?

A. 

• An unprecedented fall in crude oil prices is not a healthy sign, and reflects global markets’ nervousness amid still-evolving impact of the pandemic on global demand and activity, patchy risk sentiments would weigh on foreign flows in India and other emerging market asset classes, and keep the pressure on the Indian rupee.
• In another blow, India’s inward remittances from middle-eastern and other oil countries too may take a hit.