International crude oil prices plunged over 30 percent on Monday after Saudi Arabia and Russia locked horns over production, even as the fast spreading coronavirus is causing a demand slump.

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Brent crude futures slumped 23 percent to $34.72 a barrel by 1:55 pm IST, after earlier dropping to $31.02, the lowest in a little over four years. Brent futures are on track for their biggest daily decline since January 17, 1991, at the start of the first Gulf War.

CNBC-TV18's Manisha Gupta gives you a lowdown of what is causing crude prices to crash, and what the implications are for India.

Why are crude prices crashing?

The latest trigger for the steep fall in crude price is the break-up of the three-year alliance between Saudi Arabia and Russia. The OPEC meeting on March 5-6 in was to take stock of the impact of Coronavirus on global economic growth and align production in line with reduced demand for crude. The markets were expecting an additional cut of 1 mln barrels per day, over the existing cut of 1.7 million bpd. Thanks to the standoff between Russia and Saudi Arabia, instead of production cuts, there will be a production increase. Angered by Russia’s refusal to be part of the production, Saudi has said that it will step up production even if it means lower prices.

Why is Russia refusing to cut production?

Russia is of the view that any cut in production will only help the US oil producers. Over the last three years, even as Russia and Saudi have been cutting production, US production has been hitting record highs. In 2019 alone, US crude output was 11 percent up over the previous year.

What does the steep fall in crude mean for shale gas producers in the US?

The US shale gas industry needs crude to be above $40 to be profitable. The US shale output growth has been declining. The steep fall in crude prices between 2014 and 2016 saw many of the smaller players go out of business. One school of thought is that Russia may not be able to hurt the US much by refusing to cut production so that prices stay low. That is because it is the big US oil companies that are now into shale, and they are capable to weathering price wars.

But if Saudi increases output, won’t its revenues suffer? After all, Saudi is the largest producer of crude oil.

It will. But right now, it is a game of brinksmanship on display between Saudi and Russia. Saudi is looking to increase its market share by pumping more oil, even if it means getting a lower price. Saudi needs crude to be at $35 a barrel to be able to balance its fiscal budget.

Will plunging crude prices affect other commodities and asset classes as well?

Crude oil prices are now down by 54 percent this year till now, and this is having a negative impact on other commodities as well as other asset classes. Usually falling crude oil prices are seen as positive for countries that rely on imports for their energy needs. But a crash in crude prices reflects weak demand, which in turn means weakness in the global economy. Remember, countries that buy oil also sell non-oil stuff to oil-producing countries. And countries which sell oil buy non-oil stuff from other countries. For example, Bajaj Auto exports vehicles to Nigeria. If Nigeria’s economy suffers because of reduced oil exports, it will reduce the purchase of Bajaj Auto’s products.

This year started with near-zero demand growth for global crude oil. It was only the deal between OPEC nations and other major oil producers that was keeping crude prices stable. Also, traders and firms who lose heavily on their oil investments will pull out money from other investments to make up for the losses. This will have a domino effect on other commodities, asset classes.

How does this crash compare with the one seen in 2008-09 during the global financial crisis?

In 2008-09, the slide in oil prices was consistent. A 30 percent fall in crude oil prices in a matter of hours, like was seen on Monday, indicates panic. It is the second-largest single-day fall in history and can be likened to a fast car slamming brakes.

What does cheap oil mean for India?

Lower crude prices for India are a boon, as we import 84 percent of our requirements. India is the world’s third-largest oil buyer and fourth-largest LNG importer. We spent $111.9 billion on oil imports in FY19. So cheap crude translates into huge savings.

Should we expect a steep fall in retail petrol and diesel prices?

A huge reduction in fuel prices in India is not expected. And while crude oil prices are no longer administered by the government, the correlation between global crude oil prices and domestic fuel prices is minimal. While at the macro level India benefits from a lower import bill, sharply lower prices also hurt the tax revenues the government earns from crude. Also, India signs long term contracts with producer countries. So the benefits of short term dives in crude prices may not be passed on to consumers immediately.

First Published:Mar 9, 2020 2:47 PM IST