Crude oil output cut by OPEC and Indian Economy – A Finbingo Perspective.
Discussions about oil output were not yielding result for long. Rather on 10th March, Saudi Arabia unilaterally decided to increase oil output. This resulted in sharp fall in oil price.
Year 2020 would be first to witness negative oil demand cut after 2009. Even before corona outbreak,less oil demand was anticipated due to sluggish world economic prospects. Agreed oil output cut would stop plummeting crude rates. This was the precise reason for initiating oil output cut.
As expected Brent crude increased 3.7% to USD 33 per barrel. Whether crude price rally will continue? Answer to this question is not as simple as it appears.
Firstly, the output cut of 9.7 million barrel per day has been planned. It amounts to 10% of global oil consumption. With more than 20% fall in oil consumption this year, how long this output cut will help to keep oil price firm is the major question.
Secondly, 50% of output cut would be by Saudi Arabia & Russia and almost half of the output cut is to be bore by Nigeria and other nations. If oil price rise is not as expected, it would be hard to comply for Nigeria.
Thirdly, the output cut is twice as that of post GFC 2008 whereas this time demand reduction would be 5 times bigger.
Fourthly, the virus is certainly a factor but more of a catalyst not the cause for what was already happening, that the economy was already faltering. When the virus outbreak would recede, we should be prepared for overall weakness in global economy.
For India, lower crude prices is biggest blessings in this challenging times. In best case and worst case scenario the range of crude price would be $25 to $45. Any price in this range would be useful for India as India needs resources for spending to stimulate economy post corona. This is some silver lining for India.