International Trade Desk, New Delhi/Singapore: A big relief news has come out related to the global commodity market and energy sector. Amidst the long-standing geopolitical tension in the Middle East and the fears of a possible conflict between America and Iran, suddenly positive hopes of peace talks and diplomatic negotiations have arisen. Due to this major global development, a massive selling spree has been seen in the international crude oil market. The prices of benchmark Brent crude have registered a sharp fall of about 7 percent in a single trading session, after which its prices have come down to around $84 per barrel.
This sudden drop in crude oil prices has not only raised hopes of curbing global inflation, but has also emerged as a major economic relief for major oil-importing countries like India. Dalal Street and international financial analysts believe that if this softening of global crude oil prices persists for a long time, central banks will find it easier to cut interest rates.
Diplomatic progress between US and Iran: Why did crude oil prices fall by a huge 7%?
According to energy experts and international analysts, the escalating conflict between the US and Iran in the Persian Gulf and the Strait of Hormuz has threatened to disrupt the oil supply chain over the past few weeks. Crude oil prices have consistently remained at record highs due to this fear.
However, behind-the-scenes diplomatic talks between Washington and Tehran, initiated by the United Nations (UN) and mediating countries, have shown positive signs. Both countries have indicated an agreement to avoid direct or indirect military action and to ensure the security of supply routes.
With this renewed hope for peace, investors began selling their long positions in the international oil futures market. Furthermore, news that OPEC+ countries will gradually increase crude oil production in the coming months also put pressure on prices.
New Brent Crude and WTI rates: Global market latest
International oil futures markets witnessed heavy volatility during Monday’s trading session:
Brent Crude Futures: Brent crude oil, considered the international benchmark, fell about 6.8% to 7.1% and traded in the range of $83.80 to $84.20 per barrel.
WTI Crude Futures: US West Texas Intermediate (WTI) crude prices also fell sharply by about 7.2% and fell to a low of $79.50 per barrel.
Traders say that if diplomatic talks in the Middle East are successful and the threat of any new sanctions is averted, crude oil prices could even slip below $80 a barrel in the near future.
Sanjeevani for the Indian economy: Why will India get huge economic benefits?
India is the world’s third-largest crude oil importer and consumer. India meets approximately 85% of its domestic oil needs through imports from foreign markets. Consequently, even a $1 drop in international crude oil prices reduces India’s import bill by thousands of crores of rupees.
Improvement in Current Account Deficit (CAD): The 7% fall in crude oil prices will significantly reduce India’s import bill, which will greatly help the government in controlling the country’s Current Account Deficit.
Rupee to gain strength: Cheaper crude oil prices reduce the demand for the dollar, thereby strengthening the Indian Rupee (INR) against the US dollar.
Inflation will be curbed: In India, cheaper or stable transportation fuels reduce logistics costs. This reduces freight costs for vegetables, fruits, and daily consumer goods (FMCG products), which directly impacts the decline in CPI inflation.
Will petrol and diesel prices fall in India? Learn about the oil companies’ stance.
After crude oil reached close to $84 in the international market, the biggest question in the minds of the general public is whether there will be a reduction in the prices of petrol and diesel in the country?
In India, state-owned oil marketing companies (OMCs) like Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) fix petrol and diesel rates based on daily international crude oil prices and the dollar-rupee exchange rate.
Improving corporate margins: Oil companies’ under-recoveries (refining margins) were under pressure due to high crude oil prices over the past few months. Now, with oil prices nearing $84 per barrel, profits for oil marketing companies will increase and losses will be offset.
Chances of price reduction: If Brent crude remains stable in the range of $80 to $85 in the international market for the next 2 to 3 weeks, then Indian oil companies and the central government may consider reducing the retail prices of petrol and diesel by ₹2 to ₹4 per liter to provide relief to the general public.
Positive impact on the stock market: Paint, tyre and aviation stocks surge
News of a 7% drop in crude oil prices has brought cheers to investors in the Indian stock markets (Sensex and Nifty). Stocks in the following crude oil-dependent sectors are seeing strong buying interest:
Paint companies (Asian Paints, Berger Paints): Crude oil by-products (Monomers & Solvents) are the primary raw materials for the paint industry. Cheaper crude oil prices will significantly improve their margins.
Tyre and Auto Industry (MRF, Apollo Tyres): Tyre manufacturing uses synthetic rubber and carbon black, which are crude based.
Aviation Sector (InterGlobe Aviation/IndiGo): Aviation Turbine Fuel (ATF) accounts for over 40% of airlines’ total operating costs. A decrease in crude oil prices will make aviation fuel cheaper.
Amid global uncertainty, the peace initiative between the United States and Iran has provided a positive boost to the international energy market. All eyes are now on the diplomatic talks and OPEC+ meetings in the coming days to determine whether this decline in crude oil prices will be permanent.