Price war sends Brent crude prices to 17-year low

NEW DELHI: Saudi Arabia’s decision to escalate its price war with fellow oil exporter Russia in the midst of a global pandemic has sent Brent crude oil prices to their lowest level in 17 years.

By 8 pm Wednesday, Brent crude oil prices had crashed to $26.72 per barrel, the cheapest since October 2003 as global markets took note of the West Asian kingdom’s move to increase its oil exports to a record 10 million barrels per day.

According to Crisil Ratings, the demand destruction due to the COVID-19 outbreak combined with the Saudi-Russia price war is likely to see crude oil averaging between $35-40 per barrel in 2020, even if the outbreak is contained or moderates over the next 2-3 months.

In this base-case scenario, Crisil expects that the supply increase from OPEC and Russia will be limited and US shale output would fall by 1.2 million barrels per day as shale producers struggle to remain financially viable in a low-price environment. Demand is expected to fall by 0.3-0.6 million barrels per day due to the COVID-19 pandemic.

However, the agency also warns that in case the supply increase is higher than expected, average crude prices could fall to around, or even below, $30 per barrel. The falling crude oil prices are largely advantageous to India and would mitigate some of the impact on growth due to the pandemic.

“If prices move in the $35-40 per barrel band, the oil import bill would fall ~8 per cent on-year in fiscal 2020 and 35-40 per cent in fiscal 2021,” CRISIL said, adding that if the price averages around $30 per barrel, the benefits would be even higher.

“The benefit of lower crude prices may not be completely passed on to the end consumer on account of excise duty hikes. However, they will still stand to gain … Going forward, we expect petrol prices to further fall by `6-8 per litre and diesel, `4-6 per litre as the drop gets fully reflected,” it said.