Crude Oil Prices Drop to USD 60 – Implications for India

What’s the Point?

• Crude oil prices have continued to fall this week following OPEC's unexpected decision on May 1, 2025, to increase oil supply more than anticipated.
• The Oil Market Report (OMR) by International Energy Association (IEA) reduced its already weak expected oil demand growth for 2025, on account of escalating trade tensions negatively impacting economic outlook.
• As a major importer of crude oil, India has historically faced significant negative effects from high oil prices. Over the years, its economic profile has been improving with buffers against oil price volatility such as lower oil dependence, robust services exports, significant forex reserves.
• Lower oil prices are a significant net positive for India, improving outlook for Current Account Balance, fiscal balance, inflation, corporate margins, and aggregate demand.

Numbers in Perspective

Source: Bloomberg, CMIE, IEA. Note for Chart 1: India average cost of import derived by computing average cost from monthly import data by Ministry of commerce. Note for Chart 2: figures are in million barrels per day (mbpd)

Context surrounding this Increase in Supply

The Organization of the Petroleum Exporting Countries (OPEC) had previously announced production cuts in April and November 2023 to stabilize prices and prevent oversupply due to slower demand growth. Starting December 2024, a gradual and flexible return was announced. On May 1, 2025, OPEC announced a tripling of the supply increase compared to what was announced in December 2024, citing healthy market fundamentals and low oil inventories. This came as a surprise to analysts, resulting in lower crude oil prices. Key points to note:

1. Slower growth in oil demand: Chinese demand, a key driver of growth for oil demand, has been slowing at a significant pace. Over 2014-24, China added 60% of world demand (5.6 mbpd of 9.7mbpd), which slowed down to 18% in 2024. This can be attributed to a mix of rising dependence on renewable energy and slowing economic growth. Tariff related global uncertainty have exacerbated this situation for oil demand, despite tariff exemptions for oil, gas and refined products.

2. Increased production by non-OPEC countries, as well as some OPEC+ countries: As seen in the April 2025 OMR, the increase as announced by OPEC+ will be lesser in actuals, as some members were already producing above their quota levels. In the past 10 years, while non-OPEC countries have increased their production by 9.6mbpd to 70mbpd, OPEC country output has remained stable at ~33mbpd, reflecting a disadvantageous position for OPEC countries.

3. Uncertainty on ‘Peak Oil demand’ and eventual settled price: with significant increase in adoption of renewables in energy production and electric vehicles taking larger share of automobiles, forecasts for demand growth for oil have been weak. These reduce incentives for oil producers to control prices for future production, as demand for oil may see low / negative growth. Further, the US administration has been advocating for lower oil prices, and given their position as a major producer and consumer, this does not bode well for oil prices.

Impact on India’s Macroeconomic Parameters

India is a large importer of oil. Oil prices significantly impact India's macroeconomic parameters, including:

1. Current Account Balance: Oil accounted for ~25% of India’s overall goods imports over the past 10 years. On the net trade balance position, oil has a larger impact, at ~48% average over the last 10 years, despite seeing a drop over the past few years (43% in FY25). A drop in oil prices can have a direct positive impact on our current account balance, which has in the recent years benefited from a robust services export growth.

2. Fiscal balance: Lower international oil prices could enable the central government to increase excise duties

3. Corporate Margins: Oil prices influence aggregate corporate margins, albeit with a lag. This is because oil prices feed into base chemicals and transportation—both essential components of the broader economy. Historically, declining oil prices have had a favourable impact on corporate margins in the short to medium term, as the cost savings gradually pass through to businesses.

4. Inflation: Oil prices have direct and indirect impact on indicators such as CPI inflation, impacting items such mobility costs, cooking fuel charges. In the meeting minutes of last monetary policy committee, all 6 committee members referenced to falling oil / energy prices as one reason behind comfortable inflation outlook.

5. Aggregate demand: As a net importer for oil, a drop in imports is a direct increase in reported GDP. Further, any drop in fuel prices could lead to a real increase in consumption, raising aggregate demand.

Conclusion

Oil prices are inherently volatile and influenced by complex feedback loops. Lower prices (below $55-60/b) while beneficial to consumers, can render U.S. shale oil production less viable—especially as the sector grapples with rising equipment costs. This dynamic suggests a potential medium-term 'floor' for oil prices. Nevertheless, the recent decline in prices is a positive development for India. To reduce its reliance on imported oil over the medium to long term, India has implemented several measures, including promoting natural gas, renewable energy sources, and alternative fuels such as ethanol and biofuels, as well as encouraging the adoption of electric vehicles. These initiatives are expected to strengthen India’s macroeconomic resilience by mitigating the impact of oil price shocks.

Sources: RBI, Bloomberg, CMIE, IEA, OPEC, and other publicly available information

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