India should ink future contracts on oil trade

Amid various economic challenges arising from the spread of the deadly coronavirus, the dramatic fall in global oil prices to a level of sub-$40 a barrel following a price war between the Organization of Petroleum Exporting Countries (Opec) and non- Opec countries will only boost India’s fiscal math. A drop in crude prices by a dollar per barrel helps in reducing India’s import bill by roughly Rs 10,700 crore on an annualized basis. India imports more than 80 per cent of its total oil needs.

The total savings will translate into lower current account deficit—the difference in inflow and outflow of dollars—easing inflation and lower fiscal deficit which then naturally will push the economic growth. Not just that. A report by Kotak Strategy noted that a large number of sectors and companies will also benefit from higher demand and profitability. Besides, this also provides the adequate room to the Reserve Bank of India to reduce interest rates—a move that is expected to spur demand.

However, it is crucial for India now to actively try and ink future contracts on oil trade to ensure that it is not impacted significantly in case of an increase in crude prices, though analysts expect global crude prices to remain subdued in the coming months. The question that then arises is whether or not it is a good idea to get into future contracts. Many experts feel such deals will help the economy as it will be able to isolate itself from the price fluctuations.

According to a State Bank of India analysis, the nearly 30 per cent fall in crude oil prices could lower petrol prices by Rs 12 per litre and diesel prices by Rs10 a litre in India.

Between 2018 and 2019, average crude oil prices increased from $56.43 a barrel to $69 per barrel. In 2018, global oil prices had breached the $70 per barrel level, raising concerns for the government. The spread of Covid-19 is also set to bring down global oil and gas demand.

S&P Global Ratings lowered its 2020 price assumptions for crude to $40 for a barrel. It added that global oil demand would contract in 2020 for the first time since the 2009 financial crisis.

“Oil demand growth could contract, or be broadly flat in 2020. This largely reflects the impact from the coronavirus on travel and transport fuel demand,” S&P Global Ratings said in its report.

The US is the world’s biggest consumer of oil, followed by China, Japan and India. The 10 biggest oil consuming countries account for more than 58 per cent of the total global crude consumption per day..