Global Oil Prices Fall After Peace Deal: India Benefits, But Russian Oil is Red Line

The trend began as soon as the peace agreement was concluded on October 9 with prices falling by about one per cent immediately to 65 dollars per barrel. The decline has continued and there is a possibility that prices could fall below US$ 60 per barrel.

Why Are Oil Prices Falling

There are several reasons that oil markets are likely to continue the softening trend, apart from the fact that there is no longer any threat to West Asian oil producing countries as a result of these regional tensions. The first is that geopolitical risk is no longer adding a premium on oil prices. Though markets had not hardened much throughout the conflict, there were always concerns over the potential for disruption of oil production or exports from the region.

One of the biggest worries had been the prospect of Iran blocking the Strait of Hormuz and thereby stopping the flow of crude shipments. Fortunately, that eventuality did not occur and oil cargoes continued to flow out of West Asia without any interruption. Even so, the very fact that a conflict was under way in areas adjacent to major oil producing areas had added risk premium on prices.

Second, geopolitical tensions have eased further with the prospect of a meeting between U.S. President Donald Trump and Russian President Vladimir Putin in the coming days to discuss an end to the war in Ukraine. While this may not result in a peace deal, the fact that there is some movement forward has enthused oil markets which have moved downward again. This is because the consequence of peace in the Ukraine would mean that Russian oil would be able to flow freely once again in world markets. The easier availability of crude would lead to a bigger fall in internataional prices.

A third factor that has propelled the current softening of prices is the expectation of excess availability in the market. The International Energy Agency has projected that demand for crude would rise by only 700,000 barrels per day in 2025, a downward revision from the earlier estimate of 740,000 barrels per day. This estimate comes at the same time as U.S. inventories are going up, according to the U.S. Energy Information Administration. These rose by as much as 3.5 million barrels last week.

Demand For Energy Declining? 

To add to the pressures on the market, the latest trade tensions between the U.S. and China have given an indication that global economic woes may rise in the coming months. This would mean a decline in demand for energy and has led to deepening of the softening price trends.

As far as India is concerned, however, the dip in global prices as well as the glut in the market are both welcome developments. The fall in prices will come as a relief to the exchequer as the country’s oil imports are a major drain on resources. The estimated cost of crude purchases in 2024-25 is about US$ 103 billion. Any fluctuations in oil markets are therefore monitored closely in order to take advantage of the situation. The fact that Russian oil was available cheaply in 2022 had come as a cushion at a time when oil prices had skyrocketed to over 100 dollars per barrel. This was immedately after the Ukraine war began when oil markets were roiled by the conflict. 

Currently discounts on Russian oil are not significant but India continues to purchase as much as one third of its total requirements from this sources. This is at a time when the U.S. has launched a barrage of criticism against this country for continuing to buy oil from Russia and thereby fuel its economy. It is for this reason  that U.S. President Donald Trump imposed a punitive 25 per cent tariff on exports which came on top of an earlier 25 per cent levy.

Stumbling Block

The oil issue has become the major stumbling block in finalising the India - US trade deal. But there is little likelihood of this country agreeing to cut back on Russian oil imports in response to the U.S. demand. This is simply because, as has been repeatedly stated, this is a sovereign decision to be taken by every country in response to its own energy needs.

There are indications that India would be prepared to buy more fuel products from the U.S. which could be in the form of liquefied national gas (LNG) or propane. This would help in bridging the trade deficit and also increase U.S. energy sales.

The India- US trade deal is thus clearly on the verge of being concluded but has been stalled repeatedly over the issue of Russian oil imports. Judging by recent reports, the Trump administration is gradually getting used to the idea that this is a red line for India. With the decline in world oil prices and rising inventories, however, it is now easier for this country to further diversify its energy sources.

It may not have to rely as much on Russian purchases as in the past. But this decision would be taken keeping the country’s economic interests in mind. It is not likely to be taken at the behest of a foreign government and it would be well for the U.S. to end its harangue on this issue.