Falling Oil Prices Could Ease Pressure on India’s Trade Deficit
Lower crude prices, driven by a tentative US-Iran deal and increased Middle East flows, are expected to narrow India's trade deficit after it remained elevated in April and May.
Falling oil prices are set to ease pressure on India's trade deficit, which remained elevated in April and May due to a crude price shock. A tentative US-Iran deal and increasing flows from the Middle East are expected to drive prices lower, helping narrow the deficit. The Brent crude price has been under pressure amid expectations of increased supply from OPEC+ and the potential return of Iranian barrels, with the market shifting from backwardation toward contango as traders price in looser fundamentals. NowPrice data shows live fuel prices reflecting this trend, with Brent trading near $72 per barrel, down from recent highs.
India's trade deficit narrowed slightly to $28.21 billion in May from $28.38 billion in April, but the crude import bill nearly doubled year-on-year, reaching $22.7 billion. Higher refined petroleum product exports provided some offset, supported by robust crack spreads in Asia. As a major crude importer importing over 85% of its oil needs, India benefits from lower oil prices, which reduce its import bill and improve the trade balance. The Brent-WTI spread has narrowed to around $4, reflecting ample global supply, while US Strategic Petroleum Reserve levels remain near 40-year lows, limiting emergency stockpiles. China's marginal demand has softened amid slower economic growth, further capping prices. Saudi-Russia coordination within OPEC+ remains intact, but the group's spare capacity—estimated at over 5 million barrels per day—provides a cushion against supply disruptions.
Traders should watch for further developments in US-Iran negotiations and OPEC+ production decisions, which could influence supply dynamics. A potential deal could bring 1-1.5 million barrels per day back to market, pressuring prices. Additionally, India's demand for crude remains strong, and any sustained price decline could significantly improve its trade deficit in the coming months. Key levels to monitor include Brent support around $70 per barrel, which aligns with OPEC+ fiscal breakeven for key producers, and the impact on India's monthly trade data releases. The contango structure in the futures curve suggests storage plays may emerge, while backwardation would signal tighter supply.