Global crude prices fell again as Iran and six major world powers reached a nuclear deal on Tuesday. Global economic powers reached a landmark deal to curb Iran’s nuclear power capabilities, bringing to an end negotiations of several years.
The development would end the sanctions imposed by the western world on Iran, make the Middle-East more peaceful, increase oil supplies and push prices down. Oil prices fell more than a dollar to a three-month low on Tuesday trading around $56.87 per barrel.
While crude prices started rising in April going above $62 per barrel, the Greece crisis and China market crash brought the prices down again. Now with the deal involving Iran, they are expected to go down further.
Termed as a “historic surrender” by Israeli minister, the lift-off of sanctions will bring oil exports estimated around 2.5 billion barrel from Iran back to the market. But some analysts believe that it is still too early for Iranian oil to enter the market. “Even with a historic deal, oil from Iran will take time to return, and will not be before next year, most likely the second half of 2016,” Amrita Sen, chief oil analyst at London-based consultancy Energy Aspects, told Reuters.
“But given how oversupplied the market is with Saudi output at record highs, the mere prospect of new oil will be bearish for sentiment,” she added.
India is going to benefit from the latest development as it will help on the current account, inflation and the rate cut front. The falling oil prices will be a much-needed respite for the government which is looking to keep the economy in check as it unleashes its “Make in India” programme.
With exports growth languishing, a hike in oil prices, which constitute a majority of the import basket, would have disturbed India’s current account balance. The country was able to contain its balance of trade last year as import bill remained within limits due to falling crude prices. A further crash of the prices may help on the BoP side as the country tries to boost exports.
While oil constitutes only a marginal part of the CPI and the WPI baskets, it still has had a major impact on curtailing fuel costs in the country. A further fall in the price is expected to keep the inflation in check. With the country expected to feel the heat from the El Nino impact, low oil prices may bring the numbers down and keep it within the 6 per cent target set by the RBI for January 2016.
The biggest respite for the economy comes in the form of an impetus to rate cut that falling oil prices provide. RBI has already slashed rates thrice this year, cutting them by 25 bps in each meeting. As oil prices fall further and inflation remains around the 5 per cent mark, RBI may go in for another rate cut. In fact, with companies’ earnings languishing, markets are looking for another rate cut from RBI.
For now the economics of oil is very much in favour of India and probably the OPEC as well, as it has hurt the production of shale that US has a monopoly in.