NEW DELHI: Brent crude prices rose above $105 a barrel for the first time since 2014, after Russia’s attack on Ukraine led to concerns about disruptions in global energy supply.
The prices jumped more than 9 per cent after Russian President Vladimir Putin ordered invasion of Russian troops into Ukraine.
US contract West Texas Intermediate reached $100.54 per barrel, also a peak last seen more than 7 years ago.
Globally, stock markets crashed as investors gave up risky assets for safe-haven ones.
In India, both benchmark indices crashed nearly 5 per cent, resulting in a whopping Rs 13.44 lakh crore loss to investors during the day.
Why is it a concern
The Oil market has been dwindling ever since the start of the pandemic in 2020. Given low inventories and spare capacity it cannot afford any large supply disruption as of now.
Russia is the third-largest oil producer and second-largest oil exporter. It is also the largest provider of natural gas to Europe, providing about 35 per cent of its supply.
With the United States and Europe saying planning tough sanctions on Russia, in response to its attack on Ukraine, there is a huge possibility that it may affect cross-border financial transactions.
At least three major buyers of Russian oil were unable to open letters of credit from Western banks to cover purchases on Thursday, news agency Reuters reported quoting sources.
Prices jumped further after UK Prime Minister Boris Johnson said Britain and its allies would unleash a massive package of economic sanctions on Russia and urged the West to end its reliance on Russian oil and gas.
China has also warned of the impact of tensions on the stability of the energy market.
The escalation in Ukraine has only spooked a market that was already under stress as oil supplies around the world failed to keep pace with a vigorous recovery in demand as the coronavirus pandemic recedes.
The Opec+ coalition, led by Russia and Saudi Arabia, is struggling to restore production quickly enough, prompting some of the biggest market players to warn of higher prices.
If the situation worsens further, Opec+ may consider to increase production. However at this point it is seems highly unlikely to say anything.
How will this impact India
India is a major importer of oil and buys over 80 per cent of its needs from other countries.
The surge is oil prices is likely to have an impact on inflation in domestic markets. Besides, it will also have an effect on the rupee and the fiscal deficit position of the country.
In 2021, India imported 1.8 million tonnes of thermal coal from Russia, according to Iman Resources data quoted by Reuters.
India imported 43,400 bpd oil from Russia in 2021, about 1 per cent of overall its imports. It accounts for about 0.2 per cent Russia’s natural gas exports. Besides, GAIL (India) Ltd has a 20-year deal with Gazprom to buy 2.5 million tonnes of LNG a year which started in 2018.
Here are some probable impacts on India:
* Rise in pump prices, LPG
On of the first and foremost impact of a surge in global oil prices is the jump in petrol, diesel prices in India.
Before November 2021, soaring pump prices were a major cause of concern for the consumers as it scaled to record highs. However, prices eased after the government cut excise duty on petrol and diesel by Rs 5 and Rs 10 per litre, respectively. Most of the states followed suit by reducing the value added tax (VAT) in addition to excise duty, bringing the much-needed cheer to consumers.
Since then oil marketing companies (OMCs) have not raised prices. Retail price of petrol in Delhi is Rs 95.3 per litre, while that of diesel is Rs 86.7 per litre.
Prices have remained stable since November, even though Brent crude prices fell to $70 per barrel in December. It is likely to remain at the present level till March 10 as 5 states are holding elections at the moment.
* Impact on inflation
When oil price rises, so does inflation, as one has to shell out more for fuel.
Major global central banks like US Federal Reserve and Bank of England have already begun tightening their monetary policies and the Reserve Bank of India is also expected to raise rates in the current year.
According to a report by Bank of Baroda, a 10 per cent increase in crude oil will lead to an increase in the Wholesale Price Index (WPI) in India by nearly 0.9 per cent.
The report predicts that increasing oil price may even result in a rate of inflation based on WPI at 12 per cent and 6 per cent for FY22 and FY23, respectively.
* Rupee depreciation
The rupee tanked 99 paise to close at 75.60 against the US dollar on Thursday as riskier assets took a hit after Russia launched military operations against Ukraine.
Forex traders said sustained foreign fund outflows, heavy selling in domestic equities and elevated crude oil prices weighed on investor sentiment.
“Rupee became the worst performing currency among Asian currencies on back of month-end dollar demand from oil importers. Also, safe-haven dollar demand has surged after Russia attacks on Ukraine fuelled sell-off in risk assets,” Dilip Parmar, research analyst, HDFC Securities told news agency PTI.
* Impact on deficit position
High international oil prices has the capacity to disrupt India’s balance of payment situation.
According to a report by S&P Global Platts Analytics, a 10 per cent rise in oil prices leads to an increase of nearly $15 billion in India’s current account deficit, or 0.4 per cent of its GDP.
It has the potential to increase the country’s expenditure and affect the fiscal deficit position adversely. It this happens, it will have a corresponding negative impact on the economy as well as stock markets.
Even though India’s balance of payment is in surplus and foreign direct investment (FDI) are also at a high, concerns remain over the fiscal deficit situation.
The budget 2022 pegged a revised deficit of 6.9 per cent of GDP for the fiscal year ending March 2022 (FY22), against 6.8 per cent estimated earlier.
* Jump in ATF prices
Rise in oil prices is also likely to impact transportation costs. Besides jump in petrol and diesel price — which is a daily use commodity for majority of people — it can also lead to rise in jet fuel rates.
As it is airlines are operating reduced capacities and travellers are complaining of increased ticket prices.
Jet fuel rose to record levels across the country at the beginning of February following a steep 8.5 per cent hike necessitated due to a spike in international oil prices.
Aviation turbine fuel (ATF) price was hiked by Rs 6,743.25 per kilolitre or 8.5 per cent to Rs 86,038.16 per kl in the national capital, according to a price notification of state-owned fuel retailers.
India seeks more oil reserves
India is seeking to expand its emergency oil stockpiles, adding to already-strong demand from domestic refiners that are cranking up run rates amid a recovery in consumption.
The country wants to prioritise filling its empty storage tanks as soon as possible, government officials with direct knowledge of the matter told news agency Bloomberg. The tanks have space to hold about 8 million barrels of oil, they said.
India has enough space to hoard 5.33 million tons (39.1 million barrels) of oil for strategic purposes, the equivalent of about nine days of demand based on 2019 consumption. The country meets about 85 per cent of its oil requirement through imports.
India Inc frets
Industry leaders said the Russia-Ukraine conflict may lead to a spurt in crude oil and commodity prices, which will raise their input costs and further stoke inflationary pressures.
Biscuits and confectionery maker Parle Products said the geopolitical situation is going to have a huge effect on crude oil prices and impact several industries as trade costs are bound to rise.
“For instance, formalin oil, RBD oil will see a hike in price. Price hikes will have a huge impact on most of our products,” Krishnarao Buddha, Senior Category Head at Parle Products told PTI.
In addition, vegetable oil, which is used in several FMCG products like anti-caking agents and soaps will also experience inflation, he said.
Usha International CEO Dinesh Chhabra said if the situation escalates further, it is likely to have a grave impact on economies worldwide and by extension their financial stability, India included.
(With inputs from agencies)