Energy

Softening Global Oil Prices Provide Respite for Modi Government in Run-Up to 2019

Even without the Iran sanction waiver granted by the Trump administration recently, global demand for crude had already started moderating over the last month.

New Delhi: India’s state-owned oil marketing companies (OMCs) have been major beneficiaries of cooling global oil prices, with Hindustan Petroleum’s (HPCL’s) stock gaining as much as 45% at the National Stock Exchange since October 5.

IndianOil’s share rose 25% during this period. Bharat Petroleum has seen a 14% gain in its stock price.

The shares of all OMCs had tanked in trading at stock exchanges on October 5, 2018, after the government directed them to absorb Re 1 a litre on retail sale of petrol and diesel to provide a relief to consumers reeling from high fuel prices.

Reductions in fuel prices made by the OMCs are also much lower compared to the fall in the global oil prices during the same period.

For example, benchmark Brent crude price has fallen by over 15% between October 4, 2018, and November 2, 2018. Against that, prices of petrol and diesel in Delhi have declined 5.7% and 2.3% respectively in Delhi during the same period.

The retreat of the international oil market has also brought much relief to the Modi government, which had found itself in a vortex of uncertainty after a long run of smooth sailing.

The fear of Iran sanctions causing tightness in the global oil market has receded for the time being, with other suppliers stepping up supplies to offset loss of crude from the Persian Gulf country. US nuclear sanctions will kick in on Monday.

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Moreover, US President Donald Trump has softened his stance on Iran nuclear sanctions, providing a six-month waiver to eight big importers including India to allow them keep buying Iranian oil against the promise to cut purchases progressively.

Luckily for India and big oil importers, global demand for crude oil has already started moderating. The International Energy Agency (IEA) has cut its growth forecast for global oil demand by 110,000 barrels per day for 2018 and 2019, citing high prices, trade tensions and a less favourable economic outlook.

This growth is expected to be 1.3 million barrels a day this year, then 1.4 million barrels a day in 2019.

On the hand, US shale production may pick up over this period as oil prices are expected to stabilise around $75 a barrel.

“The six-month waiver is a major relief to India. Going forward, global oil demand growth is likely to moderate in 2018-19 while US shale production should go up, thereby keeping a check on oil price rise,” said Debasish Mishra, partner, Deloitte India.

While Trump is determined to punish Iran for its nuclear programme, he has decided to make it easy for major oil importers to shift away from Iranian oil.

The US secretary of state, Mike Pompeo, has disclosed the American plan to provide a six-month window to eight key allies including India, Korea, Japan and Turkey. China is also one of the eight countries that will benefit from the waiver which may be notified on Monday.

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While the concession will definitely blunt the impact of US nuclear sanctions on Iran,  Pompeo justified it by saying the list of waivers is far smaller than the 20 countries that were exempted from American sanctions under the previous Barack Obama regime. He also maintained that the Trump administration has demanded much greater concessions in exchange.

The sanctions are “aimed at depriving the regime of the revenues it uses to spread death and destruction around the world,” Pompeo said, adding he hoped to force changes that give “the Iranian people the opportunity to have the government not only they want but that they deserve.”

The final round of penalties target more than 700 businesses, individuals and other entities involved in Iran’s oil, banking, shipping, shipbuilding and insurance sectors.