Oil prices fall again after brief rally

New Delhi, Aug 11 (IANS) A day after crude oil prices saw their biggest rally in two months after data showed that China imported more crude in July, they retreated again on Tuesday as China devalued the yuan to boost its economy.

The global benchmark London Brent crude slipped again below the psychological $50-a-barrel-mark, after rallying almost four percent on Monday.

The Indian basket of crude oils, after having again dropped below the $50-mark this year from over $100 last year, closed trade on Monday at $49.11 a barrel of nearly 160 litres.

The Indian basket, made up of 73 percent “sour” grade crude from Oman and Dubai and the balance by “sweet” grade Brent, fell to its lowest of $46.59 in January, provoking the Reserve Bank of India to make the first of its interest rate cuts this year after almost two years.

At the RBI’s monetary policy review last week, Governor Raghuram Rajan said the fall in oil prices has been very beneficial for the country.

One of the reasons for the strength of the Indian rupee is the falling price of oil which has brought down the current account deficit, he said.

Particularly since global powers signed the historic nuclear deal with Iran last month, traders have been worried that crude supply might exceed the demand.

The global oversupply is currently running at two million barrels a day, compared to 1.8 million during the first six months of the year, American investment firm Goldman Sachs said in a report last week.

“The rebalancing of supply and demand will likely prove to be far more difficult than what was previously priced into the market,” the report said.

The markets expected OPEC’s crude production to hit a high in July. In June, OPEC production increased by 283,000 barrels per day to 31.38 million barrels per day, a three-year high, according to OPEC monthly oil market report last week.

“By keeping production high, they (OPEC) can push down prices, which will drive away new investments in oil and gas production, and eventually keep future oil and gas production down in the long-term,” said Amit Bhandari, a fellow at Mumbai-based foreign policy think-tank Gateway House.

“It is a continuation of a trend that has already started with global hydrocarbon majors such as ExxonMobil, BP, Shell, ConocoPhillips and Gazprom, among others, cutting down spending on exploration,” he said.

A fallout of lower crude prices comes from the United Arab Emirates last month, with a deregulation of petrol and diesel prices, resulting in an increase by 24 percent in the price of petrol to $0.58 per litre.

Though low prices in the short-term are welcome, there is a flip side too for oil producers like Cairn India, which reported a 24 percent drop in net profit for the first quarter ended June, caused by the fall in crude prices.

“Oil and gas fields across the world, and the companies which own them, have lost value and can be bought cheap because of low oil prices,” Bhandari said.

“Indian companies need to actively pursue this path and focus on acquiring oil fields and oil companies abroad in order to secure a stable and predictable supply of oil in the medium- and long-term as well,” he added.

 

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