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How crude oil price surge amid Russia-Ukraine crisis will impact India

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How crude oil price surge amid Russia-Ukraine crisis will impact India

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On Thursday, Brent crude prices touched $105 a barrel before easing to $99.08 a barrel, while US contract West Texas Intermediate touched $100.54 per barrel before settling at $92.81 a barrel, a high last seen more than seven years ago. For India, which imports over 80 percent of its needs from other countries, the surge in oil prices will impact inflation.

How crude oil price surge amid Russia-Ukraine crisis will impact India

The Russian invasion of Ukraine will not just have an impact on global oil prices, but also raise prices of petrol, diesel and LPG cylinders in India.

Brent crude prices breached the $100 per barrel on Thursday for the first time since 2014 after Russian President Vladimir Putin launched a full-scale military attack on Ukraine, raising concerns of disruption of global energy supply. The West rushed in with fresh sanctions on Russia for the “unprovoked” attack even as global oil prices surged and stock markets crashed worldwide.

Sensex, the Bombay Stock Exchange’s Sensitive Index, crashed 2,800 points, or 4.72 percent on Thursday, to end the day at 54529.91, while the broader Nifty fell 815.30 points to 16,247.95.

On Thursday, Brent crude prices touched $105 a barrel before easing to $99.08 a barrel, while US contract West Texas Intermediate touched $100.54 per barrel before settling at $92.81 a barrel, a high last seen more than seven years ago, Reuters reported.

Dwindling supplies

The global oil market has suffered dwindling supplies from 2020 when the world was gripped by the COVID-19 pandemic. When the recovery was in progress, oil supplies in the world failed to keep pace with the sudden surge in demand. As inventories are already low, any large supply disruption is likely to have a devastating impact on prices.

Russia is not just the third-largest oil producer and second-largest exporter in the world, but is also the largest supplier of natural gas to Europe. At present, Russia accounts for 35 percent of the region’s supply. As the US, UK and allies moved to impose fresh sanctions on Russia, speculation is rife that Russia may respond with a cut in energy supplies.

Supply constraints had already pushed oil prices higher in the last couple of months. The price of dated Brent or that of the physical North Sea crude oil cargoes that are set to be delivered on specific dates are already moving above the $100-per-barrel mark. On February 16, the price of dated Brent, established by S&P Global Platts, touched $100.8 per barrel, a peak it had last touched in September 2014, The Indian Express reported.

Impact on India

A major importer of oil, India sources over 80 percent of its needs from other countries. In 2021, India imported 43,400 barrels per day (bpd) oil from Russia, which is only 1 percent of its overall imports. Meanwhile, state-owned natural gas corporation GAIL (India) Ltd, in 2018, inked a 20-year deal with Russia’s Gazprom to buy 2.5 million tonnes of LNG a year.

The surge in oil prices will have an impact on India’s inflation. According to a report by the Bank of Baroda, a 10 percent increase in crude oil is likely to increase the Wholesale Price Index (WPI) in India by nearly 0.9 percent, The Times of India reported.

To curb inflation, central banks of the US and the UK have already announced tightening of monetary policies, a stance that the Reserve Bank of India is also expected to take in the current year.

Higher crude oil prices will widen the current account deficit, which is the difference between the values of goods and services imported and exported.

S&P Global Platts Analytics had earlier reported that a 10 percent rise in oil prices can result in an increase of nearly $15 billion of the country’s current account deficit, equivalent to 0.4 percent of India’s GDP, The Times of India report said. This will have a negative impact on both the economy and the stock market.

India’s subsidy bill will also rise with the spike in crude oil prices as it will increase the subsidy on LPG and kerosene.

How will it impact consumers?

Higher crude oil prices mean consumers will have to shell out more for fuel. Till November 2021, prices of petrol and diesel hit record highs across the country. Pump prices eased in November after the government cut excise on petrol and diesel by Rs 5 and Rs 10 per litre, respectively. A number of states also reduced the Value Added Tax on fuel.

At present, petrol is retailing at Rs 95.3 and diesel at Rs 86.7 per litre in the national capital. Rise in oil prices is also going to impact jet fuel costs that will render transportation costs higher.

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