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Current Affairs

Spike in crude prices

Date: 09 October 2021 Tags: Miscellaneous

Issue

The crude oil prices have recorded a spike in global market. This has led to temporary chaos in share markets across different regions.

 

Background

The prices of crude oil have been witnessing a steady rise since it hit a record low of $16 per barrel on April 22 last year.

 

Details

  • Over the last 5-6 weeks, the rise in crude oil prices has been sharp. Recently, it has managed to touch the $81 per barrel mark.

  • Trends indicate that the prices may reach its intermediate top level of $86 per barrel. The immediate signal is a rise before cooling off.

 

Reasons for rise

  • The economic recovery has been fast. The demand for crude oil has increased as many countries have reached their pre-pandemic levels.

  • The OPEC+ countries have cut their production to keep prices higher. In addition, oil producing economies have slowed down extraction process, affecting availability in international market.

  • Europe and Asia is experiencing a natural gas shortage crisis. Countries of the region are buying oil for power generation.

  • In countries such as India, fuel prices have increased due to high taxes imposed by state governments and central governments.

 

Impact on bonds and equity

  • The rise in demand indicates that economy is growing. Inflation observed due to natural growth may boost the yield of equities.

  • The inflationary trend may affect bond prices negatively. Higher yield will reduce the demand and also reduce prices of bonds.

  • The monetary policy will be kept stable if inflation remains transitory and it would not lead to increase in prices of commodities.

 

Impact on currency

The domestic currency is expected to depreciate as more dollars will be needed to buy oil. This is because majority of our oil needs are satisfied through imports.

 

Import bill

A $10 increase in oil prices per barrel would push the import bill by $ 8.2-$ 9.1 billion in this quarter. Half-yearly import bills could grow by 11.6% to 12.9%. 

 

Monetary policy

Following increase in demand, inflation could rise forcing the RBI to adopt contraction policies. Interest rates could be hiked to keep inflation in check.

 

Industrial production

  • An increase in crude prices will result in increase in the cost of producing and transporting goods. This would make our exports non-competitive in international market.

  • Sectors such as refining, lubricants, aviation and tyres are sensitive to oil prices. Their raw cost increases and profitability will go down. The price rise will be transferred to consumers.