Oil prices could fall to $60: Will petrol and diesel get cheaper for the common man?
Mark Matthews, Managing Director at Julius Baer, recently told NDTV that crude oil prices could fall to around $60 a barrel. His outlook comes as a positive signal, with Brent crude trading near $91.16 per barrel and WTI around $84.92, driven mainly by concerns over Middle East supplies and heightened geopolitical risks. Here’s a look at what could drive oil prices lower and whether a fall in crude prices will really benefit the common man.
Can we see a drop in crude prices in the next few months?
“Yes, there are chances that oil can touch $60 a barrel in the coming days,” said Sujan Hajra, Executive Director and Chief Economist at Anand Rathi Financial Services.
There is considerable latent supply in the global oil system. Gulf producers, particularly Saudi Arabia, Iraq and Kuwait, have substantial capacity that could return to the market, while a normalisation of geopolitical conditions could also release supply presently constrained in countries such as Iran and Russia. The IEA’s latest assessments underline both the size of this potential supply rebound and the possibility of a sizeable global oil surplus emerging once disrupted production and trade flows normalise. And these factors can lead to a drop in oil prices.
However, he drew a distinction between crude prices briefly falling below $60 and staying at that level for a longer period. “There is a relatively low probability of the latter for the next three to six months”
For oil to remain around or below $60, however, several things probably need to happen together:
- a durable de-escalation in West Asia
- normalisation of shipping routes
- some easing of sanctions and embargoes
- a substantial recovery in production
- and relatively weak global demand
“Some of these conditions are plausible; their simultaneous occurrence over the next few months is extremely low,” Hajra adds
There is also a self-correcting mechanism. If prices remain near $60 for an extended period, OPEC+ may cut production, while high-cost oil producers could reduce investment. This would limit the supply and push prices higher.
“More fundamentally, oil is perhaps one of the least forgiving markets for point forecasts. Its response to the same macroeconomic or geopolitical development can vary widely depending on inventories, positioning, spare capacity, and market psychology at the time,” the expert says.
And that is why it is better to consider possible price ranges and scenarios rather than making a fixed prediction that oil will be exactly $60, $70, or $80 on a certain date.
Would lower crude prices really help the common man in India?
Yes, but not necessarily through an equivalent fall in the price displayed at the petrol pump, Hajra points out
A sustained decline in crude prices is unequivocally favourable at the macroeconomic level, particularly if it is caused by increased supply rather than a global recession. India imports most of the crude it consumes, so cheaper oil improves the terms of trade, reduces the import bill and current-account pressure, supports the rupee, lowers inflation and improves corporate margins.
‘Petrol or diesel not going to be cheaper immediately’
“But the transmission from a barrel of crude to a litre of petrol or diesel is neither immediate nor one-for-one.”
Retail fuel prices incorporate refining and marketing costs and margins as well as central and state taxes and levies. India formally operates a market-linked pricing system, but these additional components mean that changes in international crude prices need not be reflected proportionately in pump prices. PPAC’s own retail-price framework separately identifies these tax, dealer and price-build-up components.
“Therefore, if crude falls sharply, it would be unrealistic to assume that the entire reduction will be immediately passed on to consumers as cheaper petrol and diesel,” asserts Hajra
There is another important point to consider. If oil prices fall due to increased global supply, it would be clearly positive for India. But if prices fall because the global economy slows sharply and demand drops, the impact would be mixed. In the latter case, India would save on its oil bill, but some of that advantage could be offset by weaker exports, investment and global economic activity.
So, the common man should benefit from substantially cheaper crude, but the gain is likely to be broader than the petrol pump and smaller than the percentage decline in the landed cost of crude oil, concludes Hajra
