Crude prices to stabilise as oil majors confirm biggest-ever output cuts

by Shahkar Abidi 13 Apr 2020

Global crude prices jumped by over $1 per barrel today as major oil producers finally came together to effect the biggest ever output cuts since the 2008 financial crisis. Global Brent crude prices rose $1.23, or 3.9 percent, to $32.71 a barrel on Monday morning.

Reports suggest that 23 of 24 OPEC+ members agreed to a proposal to cut output by 10m b/d in May-June 2020 but the agreement is conditional on the consent of Mexico, which is not yet on board. The US, Canada and Brazil also agreed to cut output in the G-20 energy ministers’ meeting.

Commenting on the development, ICICI Securities in a note said that it expects Brent to in the range of $25-40/bbl in Q2CY20 even if OPEC+ deal goes through due to large supply surplus, but if it falls through, it may collapse below US$20/bbl.

The development comes after weeks of a tug of war between oil cartel OPEC and Russia, resulting in crude prices falling to a two-decade low of $20 a barrel. The crude traded at $70 a barrel earlier during the year. The spiralling trend of global crude prices began a few months after China slowed down in accepting crude consignments following the emergence of Covid19. The pandemic is said to have brought down the global economic activities to a standstill and thereby impacted about 30 percent of oil demand including in India.

The decline in crude prices turned sharper on March 9, when oil major Saudi Arabia, which leads the cartel of oil producing countries OPEC, failed to get into an agreement with Russia over further curtailing of crude production to shore up the falling demand. OPEC and non-OPEC countries such as Russia have been in an understanding since the past three years regarding production levels in order to keep a check on customer prices. The failing of talks had riled up Saudi Arabia which cut its crude prices, leading to chaos in the global oil market.

Though India, being the third largest oil consumer in the world, benefited immensely from the lower crude price, not much of the gains were passed on to motorists, who continue to pay top-dollar or big bucks in rupees for every litre of petrol or diesel. The retail fuel prices have largely remained unchanged since the lockdown as vehicles, except those for essential services, are not allowed to ply.

Further,  the government in order to  shore up its revenues has increased  excise duties on the  fuel. Oil marketing companies (OMC)s too have not lowered the retail price, as they attempt to  strengthen their margins amidst weak demand for fuel caused due to the lockdown.