Oil prices in the international market soared to a three-year high of $85.75 a barrel on Monday spelling trouble for India as the country imports more than 80% of its crude requirement.
This has led to a sharp increase in petrol and diesel prices in the country and pushed up the inflation rate. Besides, the government is heavily dependent on taxes on petroleum products for mobilising resources for its social welfare schemes and development projects which adds to the burden on consumers.
Oil prices have shot up in global markets on forecasts of supply falling short of demand over the next few months as skyrocketing natural gas and coal prices have triggered a switch to furnace oil and diesel in the power sector.
According to analysts, the oil stockpiles in US and Europe have fallen to their lowest level since 2015 while demand has picked up with the recovery from the COVID-19 pandemic and industry switching from expensive gas and coal to oil for generating power.
The International Energy Agency has said the demand for oil is expected to shoot up by 500,000 barrels per day (bpd) because of the shortage of gas and coal.
That would result in a supply gap of around 700,000 bpd through the end of this year, until the Organization of the Petroleum Exporting Countries and allies such as Russia, together called OPEC+, increase production, as planned in January.
Brent crude oil futures rose 87 cents, or 1%, to $85.73 a barrel on Monday, the highest price since October 2018. U.S. West Texas Intermediate (WTI) crude futures climbed $1.12, or 1.4%, to $83.40 a barrel which is the highest level since 2014.
However, on the positive side, supply could also increase from the United States, where energy firms last week added oil and natural gas rigs for a sixth week in a row as soaring crude prices prompted drillers to return to the oil fields, according to a Reuters report.
China's economy has also slowed which could lead to a decline in the demand for oil. The world's second-largest oil consumer issued a new batch of oil import quotas for independent refiners for 2021 that show total annual allowances were lower than last year, a first reduction of import permits since these firms were allowed into the market in 2015, the Reuters report said.
