Topic 5: CRUDE: DOWNWARD SPIRAL

In May 2026, global crude oil markets experienced significant volatility, remaining one of the most important drivers of economic and financial conditions worldwide, particularly for major oil-importing countries such as India. Although oil prices eased somewhat compared with the extreme highs reached in April, they remained elevated throughout the month and continued to place substantial pressure on inflation, trade balances, and currency markets. Brent crude, the global benchmark, began May trading near $100 per barrel before surging sharply during the middle of the month amid escalating geopolitical tensions and fears of major supply disruptions. At the height of market panic, prices briefly approached $140–144 per barrel, levels not seen for many years. However, as concerns over supply shortages moderated and alternative supply routes emerged, prices retreated and eventually stabilized in the range of approximately $106–109 per barrel by month-end. Despite this correction, the average price for May remained high at roughly $108 per barrel, ensuring that energy costs continued to weigh heavily on the global economy. The primary driver of oil-price volatility was the worsening geopolitical situation in West Asia, particularly concerns surrounding the Strait of Hormuz, one of the world’s most strategically important energy transit routes. Roughly one-fifth of global oil shipments pass through this narrow waterway, making any disruption a major threat to international energy supplies. During May, escalating tensions involving Iran, the United States, and regional actors raised fears of prolonged disruptions to shipping routes and oil exports. Markets reacted by incorporating a substantial geopolitical risk premium into oil prices, reflecting the possibility of supply shortages and transportation bottlenecks. At the same time, global oil inventories were already declining, with stocks reportedly falling significantly during April and May. The reduction in inventories weakened the market’s ability to absorb supply shocks, making prices highly sensitive to geopolitical developments and daily news flow. As a result, even rumours of disruptions triggered sharp price movements. barrel Despite these risks, oil prices did not remain above $140 per because the global energy system demonstrated a degree of resilience. Increased production and exports from countries such as the United States, Brazil, and Guyana helped offset some of the supply concerns. Alternative transportation routes and pipeline networks also reduced dependence on the Strait of Hormuz, preventing a complete collapse in global supply. These adjustments eased market fears and contributed to the partial correction in prices later in the month. Nevertheless, oil remained expensive relative to historical averages, and the geopolitical risk premium persisted. For India, the impact of elevated oil prices was amplified by domestic economic conditions. As one of the world’s largest crude-oil importers, India remains highly dependent on foreign energy supplies, importing the majority of its oil requirements. Consequently, high global prices translated directly into a larger import bill and greater demand for U.S. dollars. The situation was made worse by the simultaneous depreciation of the Indian rupee, which weakened to record lows above ₹96 per dollar during May. Because oil is traded internationally in dollars, the weaker rupee meant that Indian refiners and fuel retailers had to pay significantly more in local currency terms, even when global oil prices moderated from their peak levels. This combination of high oil prices and currency weakness created a “double burden” for the Indian economy, increasing costs for businesses and consumers alike. The rise in energy costs also contributed to inflationary pressures across the economy. Fuel prices influenced transportation, manufacturing, and logistics expenses, leading to higher costs for a wide range of goods and services. State-owned oil companies, which had initially absorbed some of the increase in crude prices, gradually began passing these costs on to consumers through higher petrol and diesel prices. As a result, domestic fuel inflation remained elevated despite the modest decline in global oil prices from April’s extreme levels. Policymakers responded with several measures aimed at reducing pressure on the economy and the currency. The government increased gold import duties from 6% to 15% in an effort to reduce non-essential imports, conserve foreign exchange reserves, and help manage the widening trade deficit. India also drew on its Strategic Petroleum Reserves to provide temporary support to refiners, although these reserves were only capable of offering short-term relief. Additionally, policymakers continued promoting long-term initiatives such as ethanol blending and electric-vehicle adoption to reduce dependence on imported oil. Overall, May 2026 demonstrated how geopolitical risks, supply disruptions, and currency depreciation combined to keep crude oil a major macroeconomic challenge for India, even as prices eased somewhat from their most extreme levels.