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Oil rises as OPEC+ agree to deep cuts, U.S. stockpiles fall

GS Paper 3

Syllabus: Economy

 

Source: The Hindu

Context: OPEC+ agreed to its deepest cuts to production since the 2020 COVID pandemic, despite a tight market and opposition to cuts from the United States and others.

 

Reasons for the cut in production:

  • Fear of Recession: The 2 million-barrel-per-day (BPD) cut from OPEC+ could spur a recovery in oil prices that have dropped to about $90 from $120 three months ago.
  • Rising US interest rates: mean less investment available
  • Stronger Dollars: means less return for petroleum-producing countries.

 

Impact:

  • It would become costlier for petroleum-dependent countries including India.
  • Fear of rising inflation
  • BOP crisis may escalate for import-dependent countries with low foreign exchanges e.g. Sri Lanka

However, the real impact of a large cut would be smaller, given that some of the members are failing to reach their output quotas.

 

Opposition to the move:

  • The US will have the midterm congressional election and Joe Biden wanted US gasoline prices to be low.
  • Import-dependent developing and developed countries want the prices to be low to sustain economic recovery

About OPEC:

  • The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela and headquartered in Vienna, Austria
  • Mandate: To manage the supply of oil, set the price of oil in the world market, and avoid fluctuations that might affect the economies of both producing and purchasing countries.
  • Its membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.

The non-OPEC countries which export crude oil are termed OPEC plus countries. E.g. Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.

 

About India:

  • India is the world’s third-largest consumer of crude with 5.35 million barrels per day (mbpd), behind the US (21.2mbpd) and China (15.1mbpd).
  • India imports nearly 85% of its total crude oil consumption every year.
  • India’s own production has been below 700,000 barrels per day for a long time.
  • Iraq remains the largest supplier of Oil for India.
  • Indian Strategic Petroleum Reserves Ltd (ISPRL),has constructed three strategic petroleum reserves in huge underground rock caverns at Visakhapatnam (1.33 MMT) on the East Coast, and at Mangaluru (1.5MMT) and Padur (2.5 MMT) on the West Coast.

 

InstaLinks: 

Differences between Brent Crude Oil Vs WTI oil? Read Here 

Mains Link: 

Write a note on India’s Plan on strategic Petroleum reserves. 

 

Prelims Link: 

  1. About Crude oil and its byproducts.
  2. What is OPEC?
  3. About OPEC Plus.