ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES (OPEC)
WHY IN NEWS?
- The OPEC Secretariat hosted the 4th High-Level Meeting of the OPEC – India Dialogue via video conference.
ABOUT MEETING
- The meeting focused on the implications of COVID-19, discussing the repercussions of the pandemic and its significant impact on both the world economy and energy markets, including oil and the post-COVID scenario.
- OPEC reiterated that India’s support for the producer-consumer dialogue has greatly contributed to the Organization’s success in pursuing the sustainability of the oil market.
- During the dialogue, India invited OPEC member countries to investing establishing 6.5 MMT of commercial-cum-strategic petroleum storage under a PPP model.
- Meeting also addressed the issue of Asian Premium and term contracts.
ASIAN PREMIUM
- Asian Premium is the extra charge being collected by OPEC countries from Asian countries when selling oil, and India has been voicing its dissent against this practice.
- It has its roots in the establishment of market oriented crude pricing in 1986.
- There are 3 important benchmarks in global market, representing the cost of oil produced in respective geographies.
- Brent: Light sweet oil representative of European market
- West Texas Intermediate (WTI): US market
- Dubai/Oman: Middle East and Asian Market.
- The US and Europe has an advantage because their markets and prices were based on future trading and reflected every trend in the crude market. On the other hand, since Asia represented by Dubai/Oman do not have any derivative trading, doesn’t have that edge.
- Hence, price charged from Asian countries remained $1-$2 dollar higher than that from Europe and the US. This price differential is termed as ‘Asian Premium’.
Issues in India OPEC relation
- Sanctions on Iran: Various member countries of OPEC along with the US are creating pressure to cut down the imports from Iran that has raised serious supply
- concerns for India.
- Asian Premium: Saudi Arabia meanwhile charges premium; the extra charge being collected by OPEC countries from Asian countries when selling oil.
- Depletion of forex: Major trade with OPEC member states is in US dollar or Euro, which reduces the forex reserve of India.
- Market instability: Due to competition and production adjustment there is fluctuation in oil prices that makes hard to maintain stability of rupee and import management.
- CONCLUSION
- OPEC should do away with discriminatory Asian Premium pricing mechanism to make global level playing pricing mechanism. Also there is need to use rupee instead of dollar or euro to buy crude oil to reduce the current account deficit and improving the trade with the OPEC member countries.