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DNA Explainer: Why are oil prices rising and its impact on economy and markets

The impact of fuel hikes is visible on the stock market with growing fears of inflation, impact on currency value and input costs to companies.

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(Image Source: Reuters)
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As consumers, sharp petrol and diesel price hike is burning a hole in our pockets. The government seems to not have any control over the sharp fuel price surge over the past months even as the COVID-19 pandemic situation improves across the globe.

From hitting as low as USD 16 per barrel on April 22, 2020, the price of Brent crude oil has been rising steadily ever since and has now crossed the USD 80-per-barrel mark. The rise in crude prices has contributed to petrol and diesel prices hitting all-time highs in India.

The impact of this is clearly visible on the stock market with growing fears of inflation, impact on currency value and input costs to companies across all sectors. However, India slightly recovered on Thursday as global markets showed some positivity.

Oil price rise graph

Brent crude oil hit a low of USD 16 per barrel on April 22 last year.

Since the beginning of 2021, it has risen nearly 58% from about USD 51.8 per barrel to about USD 81 at close on Wednesday.

The rise has been sharp over the last six weeks, from USD 65 per barrel on August 20. 

According to analysts, fuel prices are nearing their intermediate top level of USD 86 per barrel.

Around this level, some cooling off is expected even though the broader trend remains rising.

Why are oil prices rising?

As the world economy recovers from COVID-19, global demand for crude oil has increased in 2021 resulting in a sharp rise in prices.

Another reason for a sharp increase in international oil prices is the supply restrictions maintained by the OPEC+ grouping nations.

Due to the pandemic, these oil-producing economies continue with slow production increases leading to a rise in oil and gas prices.

There is a shortage of gas in Europe and Asia at present which has boosted the demand for oil for power generation.

Prices of petrol and diesel in India are pegged to a 15-day rolling average of the international prices of these fuels.

High taxes by the Central and state governments too have contributed to fuel retail prices being far higher in India.

The impact

Since India imports a major portion of its fuel needs, it requires more dollars to purchase crude oil resulting in a reduction of liquidity.

The rupee is moving towards the Rs 75 per dollar mark which will result in imported goods tending to be more expensive.

As the supply chain of coal decreased, this in turn has increased the demand for oil in the international market.

Brent crude oil import accounts for nearly 20% of India's import bill.

The fuel import bill jumped from USD 8.5 billion for the quarter ended June 2020 to USD 24.7 billion for the quarter ended June 2021.

A rise in fuel prices could lead to a surge in inflation, forcing the RBI to go for liquidity tightening measures followed by rate hikes.

An increase in crude prices means an increase in the cost of production and transportation of several goods.

A surge in crude prices tends to increase India’s expenditure and adversely affects the fiscal deficit. 

A rise in prices impacts the current account deficit which means the value of imported goods and services exceeds those of exported.

A sharp surge in Brent crude oil prices can create short-term panic in the equity markets as well.

Last year during the peak of the pandemic, oil futures turned negative and stock markets bottomed out.

Since then stock markets have been on a rising spree in line with surging oil prices in the international markets. 

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