Brent at 7-year high
- January 21, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Brent at 7-year high
Subject – Economy
Context – Oil prices are at their highest levels since 2014 — Brent crude hit $88.3 per barrel on Thursday, up 27% since December 1, when it was trading at $69.5.
Concept –
Why is crude rising?
- The spike has been driven primarily by fears of supply side disruptions.
- The attack by Yemen’s Houthis on fuel trucks in Abu Dhabi,
- The tensions between Russia, the world’s second-largest oil producer, and Ukraine have raised concerns.
- The outage on an Iraq-Turkey pipeline heightened worries.
- Further, the key oil producing countries have kept supply on a gradually increasing schedule in spite of the sharp increase in global crude prices.
How will it impact the Indian economy?
- The rise in crude prices poses in flationary, fiscal, and external sector risks.
- Crude oil-related products have a direct share of over 9% in the WPI basket and, according to are port, a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation.
- India imports more than 80% of its oil requirement, but the share of oil imports in its total imports is around 25%. Rising oil prices will impact the current account deficit—the difference between the values of goods and services imported and exported.
- The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill.
How do high oil prices impact consumers?
- High crude oil prices contributed to the increase in petrol and diesel prices that hit record highs across the country in 2021.
- Pump prices fell in November as the central government cut excise on petrol and diesel by Rs 5 and Rs 10 per litre respectively, and most states followed by cutting Value Added Tax.
What can be the impact on investor sentiment and markets?
- Investor sentiment has taken a beating over the last few days in line with rising crude prices. Foreign portfolio investors who had invested have turned net sellers over the last seven trading sessions, pulling out a net of Rs12, 825 crore from Indian equities, leading to a fall of nearly 3% in the Sensex.
- Even domestic institutional investors have turned cautious, and invested a net of only Rs 239 crore over the last four trading sessions.
- The rupee has fallen nearly 1% against the dollar over the last week, and was trading at 74.45 on Thursday.
- Fund managers say markets are likely to remain volatile in the near term, and investors should not react to daily news flows in regard to their investments.
Brent and WTI
- Brent crude oil originates from oil fields in the North Sea between the Shetland Islands and Norway, while West Texas Intermediate (WTI) is sourced from US oil fields, primarily in Texas, Louisiana, and North Dakota.
- WTI with lower sulphur content (0.24%) than Brent (0.37%) is considered “sweeter”.
- Both oils are relatively light, but Brent has a slightly higher API gravity, making WTI the lighter of the two.
- American Petroleum Institute (API) gravity is an indicator of the density of crude oil or refined products.
- Brent crude price is the international benchmark price used by the OPEC while WTI crude price is a benchmark for US oil prices.
- Since India imports primarily from OPEC countries, Brent is the benchmark for oil prices in India.
- Cost of shipping for Brent crude is typically lower, since it is produced near the sea and it can be put on ships immediately. Shipping of WTI is priced higher since it is produced in landlocked areas like Cushing, Oklahoma where the storage facilities are limited.