How will a rise in crude oil prices impact India’s CAD?

Elevated levels of crude oil prices are expected to keep India's current account deficit (CAD) higher in 2019. Every $5/bbl increase in crude prices is expected to result in an additional import bill of ~$10bn.

Nov 23, 2018 01:11 IST India Infoline News Service

Oil entered a bear market in early October and Brent crude has dropped almost 25% since then.

Now, with the US granting a 180-day waiver to major importers of Iranian oil, the rising US crude oil production, and fears of an oversupply in the oil market, pressure has started mounting on the Organization of Petroleum Exporting Countries (OPEC) to act sooner than their policy meeting in December and put a floor beneath the market.

However, OPEC needs prices to balance within their budgets and shield itself from other factors such as the Iran sanctions.

Earlier this fiscal, Trump was firm on his stance over the Iran sanctions, which, along with concerns over OPEC's lack of ability to increase production as well as the production decline in countries like Venezuela, was the major reason behind the rally in oil prices prior to the recent fall.

Average global demand for crude oil stood at around 99mn bpd (barrels per day) in 2018. Transportation continues to be the largest source of oil demand globally. The biggest factor determining the demand for crude is the level of growth in a country's GDP and consumer spending. One of the reasons for the sharp rise in oil demand over the last 20 years has been the steady rise in oil demand from burgeoning economies like China and India. Thus, oil prices tend to go down when global demand patterns change and growth shows signs of faltering.

(Source: OPEC)

OPEC dominated the global supply of oil for a long time. This changed substantially in the last few years. Today, Saudi Arabia, Russia, and the US produce nearly 35mn bpd and account for close to 40% of the total global output.

(Source: OPEC)
Impact of crude prices on India’s CAD
India’s trade deficit widened to $17.1bn in October 2018 against ~$14bn in September 2018. This was majorly driven by the ~30% increase in India's oil import bill to $14.2bn against ~$10.9bn in September 2018. Overall imports in October rose ~14.1% from a year earlier to 4.7mn barrels per day (bpd), with shipments from Africa more than doubling to 874,000 bpd, as per media reports.

India’s fuel demand rose in October majorly due to a higher fuel demand during the festive season and as industrial activity picked up after four months of monsoon. This was also likely supported by some refinery units resuming operations after a maintenance turnaround. The recent fall in crude oil prices and normalized demand is expected to cap a further increase in the trade deficit in November.

Trend of trade deficit against changes in Brent

(Source: Bloomberg)

India’s economy is significantly influenced by oil prices. Elevated levels of crude oil prices are expected to keep the current account deficit (CAD) higher in 2019 and every $5/bbl increase in crude prices is expected to result in an additional import bill of ~$10bn.

CAD sensitivity to Brent
2016 2017 2018 2019E (impact at different price points)
Brent (US$/bbl) 47.5 49 57.6 75 80 85
GDP (US$ bn) 2,102 2,273 2,602 2,685 2,685 2,685
CAD (US$ bn) 22.2 14.4 48.7 77.9 84.6 91.3
CAD/GDP % 1.10% 0.60% 1.90% 2.90% 3.20% 3.40%

Related Story

Open Free Demat Account (Rs699)
Open ZERO Brokerage Demat Account

  • 0

    Delivery Brokerage for Lifetime

  • 20

    Per order for Intraday, F&O, Currency & Commodity