What The Drone Attack On Saudi Oil Facilities Means For Indian Consumers?

Brent Oil jumped almost 19 per cent, after drone attacks on Saudi Arabian facilities, with experts saying that crude oil could now touch $80 per barrel.

In early trade, Brent crude jumped 19 per cent to $71.95 a barrel, while the other major benchmark, West Texas Intermediate, rose 15 per cent to $63.34.

The drone attacks on Saudi's largest oil processing facility and a nearby oil field, knocked nearly 50 per cent of Saudi's oil production. This analysts say equals almost all of the world's spare capacity.

If the recovery is prolonged, one could easily see crude at $80 per barrel.

What it means for Indian consumers

Remember, petrol and diesel are no longer subsidized. What this means is that if there is a rally in global crude prices, it could lead to a sharp increase in petrol and diesel prices in India.

The only way it will not increase in the same proportion is the rupee gains significantly against the dollar or the government cuts excise duty on fuel.

In case both do not happen, brace for a decent hike in petrol and diesel prices in the next few days. Shares of oil marketing companies like HPCL, BPCL and Indian Oil all lost heavy ground on reports of the sharp increase in crude oil.

In fact, their margins tend to get hit, if crude oil prices rally.

Has the potential to increase inflation

Remember, a sharp increase in the price of petrol and diesel could also lead to a spike in inflation. What this means is that the Reserve Bank of India, would even have to put a cut in interest rates on hold. Stock markets have already fallen a good bit on report of the Saudi attacks, with global markets also dropping sharply.

If Saudi Arabia quickly restores production, we might see some fall in global crude prices. However, a sharp fall cannot be expected, as a thought emerges that oil facilities are vulnerable to drone attacks.

"No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend's drone attacks on the Kingdom's infrastructure -- that infrastructure is highly vulnerable to attack, and the market has been persistently mis-pricing oil," Citigroup Inc.'s Ed Morse wrote in a research note, according to a Bloomber report.

This really sums-up why oil prices could be under pressure in the months to come. This will also add to tensions between Saudi and Iran, which could aggarvate the situation further.