Ukraine War effect on oil price and impact on India

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The day of war between Russia and Ukraine began on February 24, 2022. Because of the continual threat from modern Ukraine, President Putin claimed that Russia could not feel safe, secure, or evolved. Russian tanks and troops marched in, annexed Crimea and its allies, and attacked airports and military headquarters. Ukraine was fleeing their homes with booms at the same time. Many industries and activities were impacted as a result of this. The oil industry is one that has been impacted. Oil prices are soaring because the US has hinted at a restriction on buying Russian energy while it looks to other countries to boost supplies. The Russian invasion of Ukraine not only disrupted global crude supplies, but also led to US and European sanctions. Following tensions between Russia, the world’s second-largest oil producer, and Ukraine, oil prices have risen in recent months due to supply concerns. Oil prices continued to rise, temporarily topping $110 per barrel, as Russia’s war against Ukraine raged on. The majority of the research According to the report, rising gasoline and diesel prices derived from crude oil will prompt cost-conscious consumers to switch to electric vehicles more quickly, boosting investment in competing clean technologies such as hydrogen. However, as fossil fuel companies hurry to cash in, these high prices will spur increased drilling of oil and gas around the world, laying the seeds for the boom to turn into a bust. This will restore oil’s abundance and affordability. $110 increase in oi pricing the price of trading oil rises by 15% as a result of this. As a result of all of this, other countries are reluctant to buy Russian oil. However, Russia is still able to find a market for the majority of its manufacturing by offering discounts of $15-20 per order. Oil prices have an excessive impact in OECD countries. Vehicle ownership per capita is higher in developed countries. As a result, oil consumption in OECD transportation accounts for a higher proportion of total oil consumption than in non-OECD countries; it is also more mature and slower-growing. As a result, economic conditions and policies affecting goods and people transportation have a substantial impact on overall oil consumption in OECD countries. Many OECD countries have increased fuel taxes and programs to enhance new car fuel economy and encourage biofuel use. Even in periods of great economic expansion, this tends to restrain the rise of oil use. Furthermore, OECD economies tend to have larger service sectors than manufacturing ones. As a result, rapid economic growth in these countries may have a different influence on oil consumption than it does in non-OECD countries. The harsh reality is that we are still reliant on Russian gas and oil, and forcing European companies to stop doing business with Russia would have massive implications throughout Europe, including Ukraine, as well as globally. The market turbulence is fueling fears that the cost of many common commodities, such as food, gasoline, and heating, would continue to rise at their quickest rate in 30 years. After Saudi Arabia, Russia is the world’s second-largest crude oil producer, supplying almost a third of Europe’s needs. Last week, the price of Brent crude increased by more than a fifth, owing to concerns about a decline in Russian supplies. Even if Western governments do not impose sanctions on Russian exports, Russia’s invasion of Ukraine will impede global energy commodity movement. That may be interpreted as an acknowledgement of Russia’s importance in the world supply of key commodities, particularly natural gas, which Russia supplies around 40% of Europe’s annual consumption. Even if the US, Europe, and other allies such as Japan and South Korea decide not to impose sanctions on Russia’s energy exports, private corporations will almost certainly do so on their behalf. Even without sanctions, the dangers of doing business with Russia will become too great for many corporations to bear. The G-7 foreign ministers have issued a statement on Ukraine-Russia, which concludes with the following remarks:

We’re also keeping a careful eye on global oil and gas market conditions, particularly in light of Russia’s continued military aggression against Ukraine. We support constant and constructive dialogue and cooperation among major energy producers and consumers in pursuit of our common goal of global energy supply stability, and we stand ready to intervene if necessary to address possible disruptions.

S&P Global Dated explains Brent is a price reference in physical terms and daily spot deals, as well as a bellwether for the oil markets. Brent is used by national oil firms in their official selling prices every month, governments use it to handle taxes and royalties, and it is at the center of floating spot pricing, global tender contracts, long-term strategy planning, and shorter-term product cracks. Brent is an important component of controlling price exposure in other commodity markets, such as LNG and pipeline gas, and changes in Brent futures provide insight into the overall health of the global economy. Physical forwards and weekly contract-for-difference (CFD) swaps let market participants manage their price risk and physical exposure to light, sweet oil in global markets, while Brent futures provide quick and easy access for hedging or investment.

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The conflict between Russia and Ukraine could raise oil prices, putting India’s rising inflation at risk. Although India imports more than 80% of its oil, oil imports account for only about 25% of its total imports. The current account deficit, which is the difference between the value of goods and services imported and exported, will be impacted by rising oil prices. More crucially, the jump increases the pressure on state-owned oil dealers to raise retail prices, which is bad news for the NDA administration. These increases have been put on hold as a result of the state elections, although an increase is likely as soon as the polls close. Given the potential for cascading inflation as a result of the projected price increase, calibrating the raise has become more difficult.

The wholesale price index in India rises by 0.9 percent to 1% for every 10% increase in crude oil prices, while the consumer price index rises by 0.4 percent to 0.6 percent. According to S&P Global Platts Analytics, a 10% increase in oil prices results in an increase of about $15 billion in India’s current account deficit, or 0.4 percent of GDP, causing the rupee to depreciate. According to Platts Analytics, among Asia’s big four oil consuming countries, China is well-positioned as it has substantial domestic production, coupled with relatively high SPR levels. China’s relatively low inflation rate means that it has leeway to boost economic growth if needed, which it expects to be 4.9 per cent for 2022, with oil demand growing at 560,000 b/d.

“India, on the other hand, is more vulnerable as it depends heavily on crude imports, and it has relatively low SPR compared to other major Asian consuming countries. India’s soaring consumer price index continues to be a cause of concern for the economy, although growth is expected to be strong at 8 per cent for 2022,” Lim of Platts Analytics said.

At a recent meeting of the Financial Stability Development Council, the rise in global crude oil prices was mentioned as a possible catalyst for India’s financial instability (FSDC). “It’s impossible to predict how crude prices will move. When the FSDC was looking at the threats to financial stability, one of the things that came up was crude “Nirmala Sitharaman, the Finance Minister, stated. “These are international alarming situations in which we have expressed our desire for a diplomatic solution to the unfolding crisis in Ukraine. These are all headwinds “According to the Finance Minister. “India needs to be prepared for energy market volatility,” Aditya Shah says, laying out the various scenarios that could occur. He stated that oil is clearly on the rise, which will have a negative impact on the Indian economy in the short term if the US releases oil from its strategic stockpiles. “It does not bode well for the Indian economy as a whole because a larger oil import bill will increase the current account imbalance.” As a result, inflation will be pushed into the Indian economy as well as the world economy.

Author:  Shubhi Khandelwal, Narsee Monjee Institute of Management Studies

Editor: Kanishka VaishSenior Editor, LexLife India