Brent crude futures fell below US$90 a barrel on Tuesday for the first time since 31 August, according to Reuters.

By 13:34 GMT, Brent was down 3.15 percent at US$89.65 a barrel. US West Texas Intermediate (WTI) crude fell 2.68 percent to US$84.52 a barrel, Reuters reported.

Brent has lost about 23 percent of its value since reaching a high of US$118 a barrel on 30 October, after a sharp fall over recent days.

The decline followed signs of easing tension between the United States and Iran. US President Donald Trump indicated that Washington would hold off on further military strikes against Iran, and his remarks reduced fears of prolonged disruption to oil supplies from the Middle East.

Analysts also pointed to growing production and signs of a potential oversupply in the international market as factors behind the fall.

Background

Brent is the international benchmark that many oil contracts around the world are priced against. WTI is the main US benchmark and usually trades at a different level to Brent.

Sri Lanka imports the crude oil and refined fuel it needs, and pays for those imports in foreign currency, mainly US dollars. Movements in global oil prices therefore feed into the import bill, the pressure on foreign exchange and the cost of fuel to the Ceylon Petroleum Corporation (CPC) and other suppliers.

Domestic fuel prices are set under a pricing formula and are revised periodically. The formula takes into account the cost of procuring fuel, the exchange rate and taxes, which is why the price at the pump does not move in step with day-to-day changes in the oil market.

What it means

The continued fall in global crude prices could bring some relief to fuel-importing countries, including Sri Lanka, by lowering the cost of buying oil on the international market.

Any reduction in domestic fuel prices would depend on several factors, including procurement costs, exchange rates, taxes and the government’s fuel pricing mechanism. A lower Brent price alone does not mean an automatic cut at Sri Lankan filling stations.

A lower oil price can ease the pressure on the dollars Sri Lanka needs to pay for fuel imports, though the effect depends on how long the lower prices last.