The thumping victory of Narendra Modi led BJP in the state assembly elections will enthuse markets as a strong stable government at the centre will be able to push forward the reforms agenda much more effectively.Petering out oil prices is another cause to rejoice. After a calm few months, it’s fallen almost 10% over the past few days to below $50/barrel – its lowest level since early December.This is great news for India as we import more than 75% of our oil requirements and oil is a major contributor to our current account deficit.A pickup in growth will not be coupled with higher inflation as a stable oil price regime will place a lid on it.
Why are Oil prices falling…?
Apparently there is too much oil being produced relative to demand. For example, inventories in the US are at historically high levels. To some extent this is because US oil production has picked up since the oil price increased, as it became more profitable to drill oil. Now that there’s more oil coming on stream, the increased supply is putting pressure on the price. A point to note is that Oil giant Shell recently announced a deal to sell its Canadian oil business. Canada’s oil is among the most expensive to produce in the world. Shell divesting its Canadian business could be read as a sign that they don’t believe that oil price moving up anytime soon.
Earlier last year Saudi Arabia the largest Oil producer promised to cut oil output by 486000 barrels a day, which they have kept and which had kept oil prices above 50$ a barrel.
The competition is on between the American Oil & Gas producing companies popularly known as “Frackers” and the cartel of all producers OPEC. American Frackers have improved their technology, lowered production costs and are now filling the gaps in supply caused by cut in production by the other oil producers.
Saudi Arabia will try its best to prop up prices even if it has to cut production and let American frackers run amok.
Saudi Arabia has plans to float the IPO of Aramco the largest IPO in history.Aramco is a Saudi Arabian national petroleum and natural gas company based in Dhahran and is considered to be the most valuable company in the world. It will be hard to sell the shares to investors if oil prices are on a downward spiral.
Saudi Arabia may also not want to pick a fight with the Trump led new administration in the US whose approach to trade is aggressive and confrontational.
Be that as it may a low oil price means better fisc, a better economy which is a positive for our markets.