Oil prices on Monday tumbled to levels not seen in more than two decades with the West Texas intermediate (WTI) crude in the US declining below the $15 per barrel mark, its lowest in 21 years.

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WTI crude is currently trading at $14.78 per barrel, down 19.5 percent from its previous close. Brent crude was at $27.66, 1.5 percent lower from the previous close.

The fall comes despite the recent output reduction deal between the Organization of Petroleum Exporting Countries (OPEC) and allies which, many expected, would stabilise the prices. However, due to the COVID-19 pandemic, a large slip has been witnessed in demand, leading to oil prices continuously declining.

Here's a detailed explanation on the current decline in the oil prices:

Why are crude prices plunging?

The reason experts aren’t surprised at the sharp drop in crude prices is because consumption of gasoline (petrol) and diesel has fallen sharply with fewer vehicles on the roads, fewer tractors on farms, fewer diesel locomotives chugging along and diesel gensets operating. The basics of pricing in economics dictate that prices reach equilibrium where demand equals supply. Today, the demand isn’t enough to absorb the supply.

Is this a structural issue or a short-term trend?

How long-lasting the impact on crude prices will be is directly related to the length of the lockdown. Already, storage capacities for crude across the world are near full-up. If the lockdowns worldwide continue much longer, there is a strong possibility that more output cutbacks will happen, and that could mean the less efficient oil producers would shut off their oil taps first. And for a large section of them, restarting would be an expensive affair unless crude prices reach the pre-COVID levels. So, when demand finally revives post lockdown, the supply will also have got tightened and this could actually lead to a strong reversal in crude prices.

How do experts see crude prices faring over the next six months?

Most experts see the possibility of a strong revival in crude demand over the next one or two quarters as iffy, and this could keep prices under a lid for some time.

What could change the picture for crude?

A sharp V-shaped recovery following emergence from lockdown that causes a surge in demand could alter the picture completely.

At the margin, does falling crude leave the global economy better off or worse off?

The dependence of the global economy on crude has declined over the decades, though it still plays an important role in economies like India. Therefore, the impact on the global economy is far more moderate than in the past. However, oil money plays an important role in driving up asset prices—stocks, real estate and so on, and therefore it has an indirect impact on wealth creation.

What do falling prices mean for India’s economy?

India being a large importer of crude and having a crude-intensive economy tends to gain when crude prices fall. This helps reduce our oil import bill and helps improve our balance of trade—imports exceed exports by far less than usual. This helps support the value of the rupee and also contain inflation.

What does it mean for the government’s coffers?

Generally, lower crude prices are good for the economy, as transport costs go down, inflation goes down and the government doesn’t need to subsidise oil as much. Also, like in the recent past, it offers the govt an option to increase levies on gasoline and diesel sales without impacting consumption demand. This helps the government earn more revenues from taxes and reduce its fiscal deficit.

At a company level, who are the likely gainers and losers?

The immediate gainers of low crude prices are those for whom derivatives are an input, like airlines and paints companies. It can also benefit oil marketing companies, but the equation, in their case is not as simple because they may be holding high cost inventories and they also get hurt by a dip in demand. The clear casualties of low oil prices are the oil producers—like ONGC and OIL.

Also read: India's gains from falling crude prices may be temporary and limited

First Published:Apr 20, 2020 1:57 PM IST