Crude oil prices slumped around 30 per cent on Monday as Organization of Petroleum Exporting Countries (OEPC) failed to agree on an output cut deal, eventually causing Saudi Arabia to cut its prices as it is likely to increase its production. Saudi Arabia's stance has already raised concerns of an all-out price war.
Brent crude futures are currently trading around $34 per barrel.
On Saturday, Saudi Arabia announced massive discounts to its official selling prices for April, and the nation is reportedly preparing to increase its production above the 10 million barrel per day mark, according to reports.
As per analysts, the oil market witnessed the worst price fall on Monday since the 1991 Gulf War.
Why are the crude oil prices crashing?
The break-up of the three-year alliance between Saudi Arabia and Russia triggered the steep fall in crude oil price. The OPEC meeting that was held on March 5-6 was to take stock of the impact of coronavirus on the economic growth and the reduced demand for crude. The markets, however, expected an additional cut of 1mln barrel per day over the existing cut of 1.7 million barrel per day. But now, the standoff between Russia and Saudi Arabia there will be a production instead of production cuts. Now, exasperated Saudi has said that it will increase its production even if they have to resort to lowering the prices.
Well, why is Russia not agreeing to cut production?
Russia said that the cut down on production will only help the US oil producers. In the past three years, while Russia and Saudi have cut down their production, US producers have hit records. US crude production was over 11% in 2019 alone.
Now the question is if Saudi increases output, will it not have an impact on it revenues?
Yes, the revenues will definitely suffer if they decide to increase the output. But now it looking to increase its market share by increasing the production. Now, Saudi needs the crude prices to be priced at $35 a barrel to be able to meet its fiscal budget.
Will the plunge in crude oil prices affect other commodities?
The prices are now down by 54% this year and is showing a negative impact on other commodities as well. Normally, falling crude prices are seen to be psoitive for countries who rely on oil imports. But this crash reflects weak demands.
the deal between the OPEC nations and oil producers kept the crude oil prices stable but now the standoff will have a domino effect on other commodities as well as investors will pull out their investments to make up for the losses they incurred.
Comparison of the ongoing crash with 2008 financial crisis
The slip in oil prices back in 2008 was consistent and 20% fall was seen in just few hours as we saw on Monday. This is the second fall in the history.
Now, the real question is what does this mean for India?
Well, lower crude oil prices is definitely a boon for India as we are one of the largest importers with 84% of our requirements is imported from these countries. We are the third largest oil importer and fourth largest LNG importer. In the financial year 2019-20 we spent $111.9 billion on oil imports. So guess what? We'd save if the prices are lowered.
