Tag: crude oil

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Why Are India And Other Countries Releasing Strategic Petroleum Reserves?

Amidst high oil and petroleum prices, the United States, India, China, Japan, and South Korea, to name a few, have been releasing their ‘strategic petroleum reserves’. The move, led by the US, aims to pressurise OPEC+ nations to increase the supply of oil to get the rising oil prices under control. In this piece, we explore the importance of strategic petroleum reserves, the impact of rising oil prices in India, and more. 

What Are Strategic Petroleum Reserves?

A Strategic Petroleum Reserve (SPR) is a reserve/stockpile of oil maintained by countries. Countries can access the emergency stockpile in case of calamities, natural disasters, fuel shortages or other economic events. In India, the strategic petroleum reserve is maintained by Indian Strategic Petroleum Reserves Limited (ISPRL) under the Ministry of Petroleum and Natural Gas.

Founded in 2005, ISPRL has four storage facilities across India with a storage capacity of 5.33 MMT (million metric tons). With the current consumption rate, the crude oil and petroleum products in reserve could last 74 days.

What is OPEC or OPEC+

The Organization of the Petroleum Exporting Countries (OPEC) refers to a group of 13 of the world’s major oil-exporting nations. It was established in 1960 in Baghdad, Iraq. OPEC is essentially a cartel that regulates the supply of crude oil, thereby controlling oil prices in the global markets. They control 40% of the world’s supply of oil. According to estimates, ~79.4% of the world’s proven oil reserves are located in OPEC member countries. The following countries are a part of OPEC— Nigeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.

In 2016, A larger group called OPEC+ was formed to have more control over the global crude oil market. OPEC+ includes 23 countries including Russia, Mexico, Bahrain, to name a few. To know more about OPEC/OPEC+ and how it controls the global oil market, check out this article at marketfeed: What is OPEC and How Does it Control Global Crude Prices?

Why Are Countries Releasing Oil Reserves?

The past year has been wholesome for the oil market globally. First, we had the Saudi-Russia Oil price war, then we had the Saudi-UAE clash over oil. After the COVID-19 pandemic struck, countries cut short the supply of oil over low demand. The impact was such that oil prices went negative! After the impact of the pandemic subsided, industries returned to normalcy globally. The demand for oil and gas started going up. However, the OPEC+ countries did not proportionately pump up supply. This would play in favour of oil-producing nations since they would get a higher realization/profits for the oil that they sell. 

As a result of fiscal and monetary stimulus provided by countries, inflation has skyrocketed across the world. This is because all the money that the government pumped into the system made its way either into the stock market or increased consumption in general. When oil prices increase, the prices of all goods and services generally tend to increase. This is an added burden to inflation. If oil prices fall, it would be in the best interest of most countries.

Despite pressure from the United States, India, and other countries, OPEC+ refuses to increase the supply of oil. While OPEC+ has signed a plan to increase oil production by 400,000 barrels per day each month till 2022, other countries expect a lot more than that. Due to concerns of a new variant of COVID-19, OPEC+ might put a brake on that as well.

To address OPEC Plus’ obstinacy to increase oil output, countries like the US, Japan, China, India, South Korea have decided to release their strategic oil reserves. Analysts say that the move is like a ‘drop in the ocean’. Essentially, the release of strategic oil reserves might not compel OPEC+ to increase oil output. Nevertheless, after the countries announced the release of strategic oil reserves, global crude oil prices tanked by nearly 10%. Even if the gesture was symbolic, it did have an impact on crude oil prices. Since the increase in oil supply after the release of strategic reserves was minuscule, the reduction in oil prices might be sentimental. 

The Way Ahead

India’s petrol and diesel prices reached an all-time high in 2021. The government for long had refused to cut the high excise duty that it imposed on oil and gas products. In November 2021, the government finally cut down excise duty on petrol and diesel by ₹5 and ₹10 respectively. Many state governments announced further excise duty cuts to couple with it. This was a sign of relief for the people of India. 

Crude oil prices around the world have tanked 10-15% because of fears around the new variant of COVID-19, Omicron. Increasing oil prices could severely drive up inflation in India. The fear of the Omicron variant shouldn’t become an excuse for oil-producing countries to cut down further supply of oil.  The increase in inflation can also impact the value of the Indian Rupee in the market. If a country’s inflation rate is lower than that of another, its currency will increase in value. High oil prices can impact inflation all across the globe. This could disrupt the smooth flow of trade since the cost of transportation goes up. While the oil-producing countries will benefit from high oil prices, they do not realise the opportunity cost of doing so. This move could severely impact trade relations with other countries. Now, non-OPEC countries have successfully managed to create pressure on the global oil market. One can soon expect a dip in oil prices, provided it is not fuelled by the raging new variant of COVID-19. 

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History of India’s Volatile Oil Prices and Taxes

Petrol and diesel prices have crossed Rs 100/litre across most cities in India. There are many reasons behind it like the petrol supply crunch and the OPEC+, UAE, and Saudi dispute. Another factor that has been eating into pockets of Indian citizens that goes unnoticed is how the government taxes oil. As an estimate, for every Rs 100 worth of petrol you buy, you are paying close to Rs 60 to central and state governments as tax. The figure keeps varying with time. Indians pay some of the highest taxes in the world on fuel. 

In this piece, we decode the history of petrol prices in India, how it stands in the world forum, and how the government acts on it.  

History Of Oil In India

India first struck oil in Assam in 1866. Oil production began in 1889 and the Assam Oil Company was set up in 1899 to oversee its production. As a British Colony, the oil discovered in India did not benefit our country directly, and the output was used to replenish British Troops in World War I and World War II. 

In 1928, the Asiatic Petroleum Company (a joint venture between Shell and Royal Dutch) allied with Burmah Oil Company. The joint venture was called Burmah-Shell Oil Storage and Distributing Company of India Limited. In 1976, Burmah Shell was taken over and nationalized by the Government Of India. It is now known as Bharat Petroleum Company Limited or BPCL.  

After 1947, India moved to a communist regime also known as License Raj. Just like any other country, India needed a big oil industry to be a superpower. Burmah Shell (now BPCL) and Oil India, two of the largest oil companies in the country, were still a joint venture with the British-owned Burmah Oil Company. In 1959, an act was passed which gave the state-owned Oil and Natural Gas Company (ONGC) the power to explore oil and develop resources in the field. The company struck gold when it took over Mumbai High, India’s first offshore oil field discovered in 1974. 

Post-1991, after the collapse of the USSR, the Indian economy was liberalized. This meant that oil became a rather freely traded commodity and could be impacted by global power and prices. Yet, the Government continued to regulate the prices of petrol and diesel till 2010.

Deregulation, Taxes, And More

Oil prices weren’t always so volatile. Till 2010, the Government would decide the baseline price of oil in India keeping room for oil marketing companies to earn profit. In 2010, then-PM Manmohan Singh decided to deregulate the price of petrol. In 2014, PM Narendra Modi decided to deregulate diesel. This meant that the fuel prices in India would change every 15 days in line with global crude oil prices. In 2017, the Government decided to change the fuel prices every day in line with global prices. 

In May 2020, the oil future prices became negative. Shouldn’t this have made oil prices in India a lot cheaper than they actually were? The central government took advantage of low oil prices and decided to hike excise duty on petrol and diesel. The Government saw the slump in oil prices as an advantage to add cash to the treasury. Essentially, petrol and diesel are cash cows for the government.

In India, petrol prices have consistently risen. Speaking with an estimate, petrol cost Rs 50/litre in 2010 in India and has now doubled up and crossed Rs 100/litre in 2020-21. On the other hand, fuel prices have been extremely volatile, sometimes high, sometimes low. There is no fixed trend in the recent decade 

So why have fuel prices in India consistently risen? Whenever oil prices decrease, the Government increases the excise duty. Conversely, whenever the oil prices increase, the Government decreases the excise duty, but only a little. The state governments tax petrol separately. Apart from global fuel prices, the answer to high fuel prices is bad taxation and policy regarding oil prices by the Government. 

So even if the prices go down, one continues to pay the same or even a higher price for petrol. This makes us ask, are fuel prices really deregulated in that case? 

Where Are Oil Prices Headed?

Oil prices hit all-time highs after UAE and Saudi had a disagreement at an OPEC+ meeting regarding production quotas. You can check out the article over here. To know how the Organization of the Petroleum Exporting Countries (OPEC) influences fuel prices, click here.

Coming back, the disagreement between UAE and Saudi led to inflated oil prices globally. The two came to an agreement and settled their vows. Oil prices started declining globally after that, but not in India. Minister of State for Finance Pankaj Chaudhary has said that the government is not deciding to cut down the excise duty anytime soon. The revenue generated by taxing petrol and diesel will help the Government conduct vaccination drives and run welfare programs. Long and short of it, one can’t expect a cut in excise duty anytime soon, one could have to watch global oil prices fall in order to see a change in Indian fuel prices. 

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The Shale Oil Revolution: An Alternative To Conventional Crude Oil?

Petrol and Diesel in India have crossed Rs 100/litre. Crude oil is getting expensive and with prices refusing to fall, global oil-producing countries like Saudi Arabia, UAE, Russia, etc. are involved in a deadlock. While oil prices are in dismay, an alternative source to conventional crude oil is thriving in the US. It is the Shale Oil and Gas Industry. In 2020, the United States of America turned a net exporter of ‘petroleum’(not crude oil) for the first time since 1949. In this piece, we discuss the Shale Revolution in the US, the difference between Shale and Crude oil, and the economics around it. 

What is Shale Oil? How is it different from crude oil?

Speaking of conventional crude oil, it is a viscous liquid substance found beneath the surface of the earth. It can be found on land or the sea. Crude oil can be extracted directly, it is easy to transport, process, and refine. There is an abundance of crude oil reserves around the world. 

Coming to shale oil. Shale oil is mostly found on land, but sometimes also found underneath water basins. It is extracted from rocks called oil shales. These rocks are broken or fractured artificially in a process called fracking. A mixture of oil and gas erupts from these rocks which are later extracted and processed to form shale oil. It can also be used to produce a more gaseous form called shale gas. Shale oil and gas are pretty much the same as crude oil and natural gas. Just that they are obtained from special rock structures called ‘shales’.

The process is relatively new, stirring a debate on whether the oil is environmentally friendly or not. There has been a rising ‘anti-fracking moment’ in the US, whose supporters argue that the method is not environment friendly.

Shale Economics

America saw a huge jump in oil production between 2010 and 2015. This was the period when the US invested intensively in shale oil discovery. In 2020, shale oil accounted for a staggering 65% of the total crude oil produced in the US. That is a huge number. 

There are two major problems that shale oil poses. First, its extraction is a costly affair. Second, it poses a major environmental threat. Oil shales deposits are generally deeper than crude reserves. The only way to extract is to drill deep beneath the surface of the earth and extracting it. The next challenge is processing it to convert it into crude oil and petroleum.

The cost of producing one barrel of shale oil is anywhere between $35-$65. Shale oil companies would make money only when the global crude oil prices are greater than the cost of production, assuming that the demand remains intact. Essentially, higher prices would work in the best interests of the US.

There is a question that analysts pose. Are shale companies profitable? There is no black and white answer to that. Some shale companies that seized opportunity dug the right oil wells and cut down on costs, were profitable even when crude oil prices were at  $40 per barrel, much lower than the breakeven price. 

The shale oil industry saw tremendous growth under the Trump administration. Former US President Donald Trump followed an expansionist policy and believed that his country needed to be energy independent. Trump administration invested extensively in the oil and gas industry in the US. It pushed for discovering and setting up new oil fields. The current US President Joe Biden is rather conservative when it comes to the oil and gas industry. He is pushing for production cuts and lower prices because of its negative impact on climate change, the environment, and marine life. He is also in favor of renewable and cleaner sources of energy. This is something that should worry the shale oil industry. 

Speaking of the environmental impact of shale extraction. There has been a rising anti-fracking movement in the US, led by climate change and environmental activists. France, the Netherlands, Scotland, Ireland, Wales, Denmark, Bulgaria, and some other developed economies have ‘banned’ fracking for shale oil. Even in India, ONGC did start with shale gas exploration, but it yielded no results. Exploration projects in other countries have gone in vain and have been abandoned. The only country that seems to be successful in turning it into a profitable venture is the United States of America. 

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Explained: OPEC+ Crisis, UAE-Saudi Clash Over Oil

While India’s petrol and diesel prices have crossed Rs 100/liter in most states, the top oil-producing nations are in the middle of a price war. The war is between OPEC+, UAE, and Saudi Arabia. In case you do not know what OPEC is we highly recommend you go through this piece on marketfeed on What is OPEC and How Does it Control Global Crude Prices?

Nevertheless, let me give you a brief about OPEC. OPEC stands for Organization of the Petroleum Exporting Countries. Established in the 1960s consisting of 13 of the world’s major oil-exporting nations. The purpose of the organization was to control the global supply of oil and its prices, thereby giving a fair price discovery to all member and non-member nations. 

OPEC+ or OPEC Plus was a cartel formed in 2016 by 10 other oil-producing nations excluded from OPEC, these were Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. OPEC and OPEC Plus were later amalgamated and now work together making OPEC Plus a 23 member organization. 

The organization conducts meetings twice a year to establish specific quotas or targets for each member based on current supply and demand, as well as expectations of future supply and demand. The basic norm is that all member nations have to follow these quotas. Since most of OPEC Plus’ oil production comes from state-run oil companies, it is easy for officials to control output/supply.

The Clash

When the pandemic started, oil consumption went down, demand decreased and therefore oil prices fell. In fact, in the US, WTI oil futures prices went negative to -$37.63 a barrel. To protect these oil prices from falling further OPEC nations decided to cut production since it would reduce supply and prices would eventually rise. The OPEC countries formed a pact to cut oil production till April 2022. The plan worked well so far till the global crude oil price surpassed normalcy. In India, many states have reported petrol prices crossing Rs 100 a litre. The OPEC nations have now decided to meet and mitigate the issue of soaring oil prices. The natural thing to do would be to increase oil production. On 5th July, the member countries met at a video conference, but the meeting was called off after a spat between UAE and Saudi Arabia. 

Problem #1: UAE wants to produce more oil, Saudi disagrees

OPEC Plus allots a baseline quota to each nation. A country needs to keep up with its baseline quota of producing oil. Neither too much, nor too little. UAE has been allotted a baseline of 32 lakh barrels per day. UAE Energy Minister Suhail Al-Mazrouei said that the level is “totally unfair and unsustainable.” The UAE thinks it can produce more than the current baseline, it says that it can produce 38 lakh barrels per day. Obviously, more barrels produced would mean more money coming into the country. 

Energy Minister Al-Mazrouei believes that the country has ‘sacrificed’ a lot in terms of production capacity as compared to other members. Saudi Arabia on the other hand believes that THEY sacrificed more production capacity as compared to other countries. Astonishingly, Saudi is the LARGEST producer of oil amongst the OPEC Plus countries and in the world. 

Problem #2: Saudi says extend agreement date, UAE refutes

OPEC had signed an agreement for cutting oil production that was valid for two years ending April 2022. Saudi Arabia wants the agreement for oil cuts to be ‘extended’ by 6 months till the end of 2022.

Naturally, UAE would not be happy with the extension as they would lose an opportunity to earn some extra income given that they are focussing on increasing oil production.

The 18th OPEC Plus meeting was called off. This is not the first time that there has been a clash amongst OPEC nations. Last year, Saudi and Russia had a disagreement on cutting oil production where Russia refused to cut oil production, unlike other OPEC nations. There have been multiple instances where different countries conflicted on production and price. In most conflicts, Saudi has a role and seems to be the big brother of OPEC member nations.

Saudi and UAE are amidst a political cold war. Saudi had imposed trade restrictions on UAE. Any company operating in Saudi would be forced to set up their regional office in Saudi or face business restrictions. This would mean that companies operating in both countries would have to choose between the two. Saudi Arabia imposed travel restrictions to and from UAE the very next day the OPEC Plus dissension took place. 

How Does This Conflict Impact India?

India’s ex-Petroleum Minister Dharmendra Pradhan had locked horns in the international forum with Saudi Arabia. Pradhan had pressed OPEC to cut down on production curbs in other countries. He had stated the importance of the right petroleum prices for all-around economic development. 

India had filled its ‘strategic oil reserves’ when prices were rock bottom last year. These reserves would then be used to cushion oil prices whenever they soared. Saudi had also nudged India to use these reserves instead of pressing for reducing production curbs. So can India actually use these reserves to control oil prices? The answer is NO. These reserves are way too small to have an impact on oil price control. India is planning to double its strategic reserves in the near future. It is planning to privatize the whole initiative incentivizing private companies that set up strategic oil reserves 

India faces way too many problems right now. Uncertain monsoons, rising inflation, possible US interest rate cuts, and high petrol prices. If petroleum prices are not curbed, India can expect some really high inflation rates. Goods would become expensive and transportation costs would increase. The only option available then would be for the government to cut down on high taxes that it charges on petrol. It would be in the best interest of India for UAE and Saudi Arabia to settle their vows and come to an agreement.

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Will Fuel Prices Come Down Soon?

As we know, petrol and diesel prices have been rising exponentially over the past month or so. The rate of petrol has crossed Rs 100 per litre-mark in the states of Rajasthan and Madhya Pradesh. When global crude oil prices declined heavily last year, all of us expected a reduction in fuel prices in our areas. However, our central and state governments used the opportunity to increase taxes. We saw a high surge in excise duty on petrol and diesel by Rs 10 per litre and Rs 13 per litre, respectively. And now, oil-producing nations are limiting their supply to energy-dependent nations (such as India). This is causing a further hike in prices. 

Will we see some form of relief in petrol and diesel prices in the days to come? Let us find out.

Breakdown of Petrol Price

On February 16, 2021, the price of petrol in Delhi stood at Rs 89.29 per litre. This is a growth of around 24% from the corresponding month last year. Let us take a look at how this particular amount is derived.

(Value Added Tax (VAT) differs from one state to another) Source: IOCL Official Website.

Thus, taxes imposed by the Centre and Delhi state government together constitute approximately 60% of the final retail petrol price. Amidst the Covid-19 pandemic, the government has been desperately trying to cover its vast expenses and foreign debts. It has been estimated that the hike in excise duties and cess on petrol and diesel would allow the Centre to raise ~Rs 1.6 lakh crore. In the end, it is all of us that face the brunt of very high fuel rates. Industries that are highly dependent on petrol and diesel for running their day-to-day operations would also begin to incur high costs. 

Will Fuel Prices Decline Soon?

As mentioned before, crude oil prices declined drastically in 2020. (It fell to almost ~$20 per barrel in April). This was primarily due to the lower demand for fuel amidst the Covid-related lockdowns around the world. India was facing one of the biggest economic contractions in its history. Our government should have focused on cutting taxes and putting more money into the hands of common citizens. However, in May 2020, the government increased central excise duties on petrol and diesel from Rs 20 per litre to Rs 33 per litre. During the same period, state taxes had also gone up by around 21%. Thus, normal consumers like you and I did not receive any benefit from the decline in crude oil prices. 

With global economies slowly recovering and people receiving vaccines, the rate of Brent crude oil has shown a sharp rise to $67 per barrel (as of Feb 25). However, our government has outrightly stated that it will not cut excise duty on crude oil. Earlier this month, Union Oil Minister Dharmendra Pradhan said that the Centre and state governments rely heavily on collections from taxes on crude oil “for meeting their developmental and welfare priorities”. Thus, the Centre is focusing on higher tax collections to achieve its revenue targets. The government has not addressed the common issues faced by the working-class population, who are facing huge difficulties due to the surge in petrol/diesel prices.

On the other hand, oil-producing nations (such as Saudi Arabia) have used the present opportunity to limit their supply and drive prices. This is likely to sustain until all nations join hands, conduct discussions, and come with a solution. India has urged the Organisation of the Petroleum Exporting Countries (OPEC) to bring an end to the regulation of crude oil production. When we take all these points into account, the prices of petrol and diesel are unlikely to decline anytime soon.

Conclusion

The rising fuel prices have severely impacted the middle-class and lower sections of Indian society, who were already hit by the Covid-19 pandemic. The situation is so bad in some areas that people are traveling extra miles to buy cheaper fuel or even smuggling it from neighbouring nations. From the food you order to the vegetables and fruits you buy, everything is likely to become costlier. It would trigger inflation, which could ultimately slow down India’s economic recovery. However, the fact remains that the consumption of petroleum is at an all-time high, despite the rise in retail prices. 

On a day when petrol price crossed the psychological barrier of Rs 100 per litre, Prime Minister Narendra Modi blamed the previous governments for not focusing on reducing India’s energy import dependence. Every aspect of this issue has led to a blame-game between the Centre, state governments, and oil marketing companies (OMCs). [OMCs such as Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum are now benefiting from higher margins] None of these parties are willing to take the first step towards bringing down the rates.

Finance Minister Nirmala Sitharaman has called for the Centre and state governments to conduct formal discussions to bring down the retail fuel price at a “reasonable level for consumers”. Let us look forward to seeing how the situation unfolds in the weeks to come. 

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5 Reason Why Commodity Prices Are Increasing and Impact on Stock Market

Last year, the prices of commodities such as crude oil, silver, copper, etc saw a significant fall due to the Covid-19 pandemic. All major economic activities were disrupted as countries went into complete lockdowns. Now, the situation has more or less turned for the better, and commodity prices are witnessing a strong recovery. Copper prices have rallied by over 60% since the beginning of the year and have hit their 10-year high. The price of Brent crude oil, which fell to $20 per barrel in April 2020, has shown a sharp rise to ~$65 (as of Feb 23). The prices of Silver and Platinum have also shown monumental gains over the past year. 

Let us understand some of the reasons behind this surge in commodity prices.

Factors Behind the Rally in Commodity Prices

  • During a period when countries were under strict lockdowns, China began to open up its factories. They had a headstart in manufacturing activities. In fact, the Chinese factory output in November 2020 hit a 20-month high. Thus, there was a huge rise in demand for commodities from the country, which led to a rise in its prices. There were also reports stating that China has been hoarding steel and is controlling its prices.
  • As lockdown restrictions were lifted globally, the demand for industrial commodities started rising. The different sectors of the economy began to ramp up production activities. At the same time, supply chain disruptions or logistical issues continued. Commodity traders blamed the global container shortage as a major reason for high transportation costs. This ultimately led to a surge in the prices of essential commodities such as steel, copper, tin, and aluminium.
  • Recently, oil-producing nations have limited their supply to energy-dependent countries such as India. This has caused crude oil prices to increase exponentially.
  • The passing of the $1.9 trillion US stimulus package can also be attributed to the sharp rise in commodity prices. Financial analysts state that the package would lead to further demand for commodities as people will spend more (or more money will be in circulation).
  • Investing in the commodities market is a great way to diversify your portfolio. Over the past few months, hedge funds have invested billions of dollars into this market. This is primarily due to the optimism surrounding vaccine rollouts and economic recovery. It has been recommended as one of the best asset classes to hedge against inflation, leading to a sharp increase in returns.
  • As most countries are on the path towards building renewable energy infrastructure, the demand for metals is at an all-time high. This is driven by an increase in the production of batteries, solar panels, and electric vehicles (EVs).

What is the Impact of Rising Commodity Prices?

The commodities market is receiving a lot of attention from investors around the world. They are collectively pulling money from the stock markets and infusing billions into commodities (due to its high returns). Investment groups and hedge funds are also investing heavily in bonds due to higher yields. However, this may be a short-term phenomenon until financial institutions reshuffle their portfolios.

As India came out of its Covid-related lockdowns, we witnessed pent-up demand for commodities- which led to a further rally in its prices. This has caused fears of inflation in our domestic market. The high price of steel has heavily impacted the automobile and infrastructure sector. We saw companies such as Maruti Suzuki, Tata Motors, Mahindra & Mahindra, and Hero MotoCorp introducing price hikes for their vehicles in January. The continuous surge in prices of raw materials would also affect the real estate sector in the long term. Developers would face an increase in overall project costs, and homebuyers would have to pay more for acquiring assets. The general rise in demand with a fall in supply is helping no one.

One of the most serious issues that Indians face today is the continuous increase in fuel prices. The price of petrol has even crossed the psychological barrier of Rs 100 per litre in several cities. The rise in global crude oil prices and high taxes (or excise duties) are concerning. This ultimately leads to a surge in prices of essential items such as food. With no solution in sight, the middle-class and poor sections of society continue to suffer. Let us look forward to seeing how the situation unfolds in the weeks to come.