How India Can Address the Risk of Rising Oil Prices
May 29, 2015
After falling more than 60 percent from 2014 levels, the price of petroleum has risen sharply ― from $46.7 per barrel in early February to $66.5 per barrel in early May. As a result, the price of India's crude basket, which is a mix of Oman, Dubai, and Brent crude, has gone up by 40 percent. In its latest Oil Market Report, however, the International Energy Agency says the price rose in April and May despite "persistently high global supply and continued stock build."
Gateway House has earlier said that energy prices will not worry India in 2015, barring a catastrophic event in a major oil producing country such as Iran or Saudi Arabia. Now, adverse developments in both these countries have indeed increased the chances of such an event.
- Potential disruptions of the oil supply come from the risk of dissatisfaction among the Saudi princes following the change in the line of succession, which confined kingship to one branch of the family.
- Potential disruptions come from disturbances of supply lines due to fighting in Yemen, with Iran intercepting merchant ships in the Persian Gulf.
- Potential disruptions come from the escalation of tensions between Saudi Arabia and Iran, both of which are large oil supplies, due to the Yemen conflict.
As an importer, India should buy oil futures to lock in low prices. This hedging can be done by the state-owned oil companies, because they understand the dynamics of the oil market. To enable hedging, the Ministry of Petroleum will have to create guidelines, such as the price levels at which hedging is to be done. Due to the limitations of financial hedging, India will also need to start buying oil fields to gain more control over the markets.
Source: Amit Bhandari, "How India Can Address the Risk of Rising Oil Prices," Gateway House, May 28 2015.
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