Oil refinery ( Image for representation purpose only)
Credit: Reuters File Photo
Even as the COP29 ended on an acrimonious note, global fossil fuel prices are drifting downwards, making them more accessible than ever in the recent past.
The moderation may well continue through next year, easing the financial burden of big importers like India. Much will depend, however, on geopolitical tensions and the state of China’s economy. For the short run, however, oil markets appear to be awash with inventories and bearish trends are holding sway.
The December 1 meeting of the Organisation of Petroleum Exporting Countries (OPEC) thus looks set to continue existing curbs on output. These were meant to be eased gradually from next month, but the deadline is now likely to move to the new year.
A Donald Trump presidency could also have a bearing on the international oil and gas scene. His much-quoted comment about planning to boost oil drilling — “drill baby drill” — has been interpreted to mean that United States oil companies will step up production.
The aim is to bring down gasoline costs for the consumer, a key campaign pledge of the president-elect. The promise may end up being difficult to fulfil, given that the fossil fuel companies backing him do not want to create a situation that accelerates softening of global oil prices.
Prices of the benchmark Brent crude had risen slightly in the past few days to about $74 per barrel primarily due to geopolitical tensions especially the latest escalation in the Russia-Ukraine war.
These have now subsided again to $73.27 with West Texas Intermediate at $69.18. For the past few months, crude has been hovering in the range of $70-74, the lowest ever since the Russia-Ukraine war began in February 2022.
In case US oil and gas companies, especially those producing shale oil, do raise output, world prices could fall to even lower levels. This is not an outcome sought by these firms as they are mandated to make profits, not to raise output at any cost.
Even the chief executive of ExxonMobil, the largest US oil company, expressed scepticism over Trump’s enthusiasm for more drilling. For these energy majors, it makes more sense to restrict output and ensure stability in prices.
Their interests in a Trump presidency would be easing of regulations on climate change and liberalisation in policies allowing fracking on government-held land.
What could have a greater impact on the oil markets is a revival of China’s economy. The debt package announced recently by Beijing has so far not been viewed with much enthusiasm though it may help in long term recovery.
Even so, oil demand is expected to remain weak. A major cause is the weakening of fossil fuel consumption due to creation of renewable energy capacities along with electrification of the transport system.
China is one of the biggest consumers of electric vehicles currently and this has gradually reduced its huge appetite for crude oil and natural gas. The continuing construction slump in the real estate sector has added to the decline in demand for petroleum products.
The prospect of heavy tariffs being imposed by the Trump administration is another reason for oil consumption likely to be muted next year.
The International Energy Agency (IEA) has declared that Chinese oil demand is firmly in contraction, falling by 1.7 per cent year on year in July, a marked contrast with the 9.6 per cent average growth in 2023. It thus expects annual growth of only 1.1 per cent in 2024, while demand is expected to remain weak in 2025.
The geopolitical scenario is also expected to play a critical role in determining oil market movements over the next year. The Israel-Hezbollah ceasefire, for instance, has already led to softening of global prices as peace in part of West Asia means that oil and gas output can continue without disruptions.
Any expansion in the conflict with Gaza would create price volatility yet again. As for the recent ramping up of hostilities between Russia and the Ukraine, these had earlier sent ripples through oil markets.
For the time being, however, Russian crude supplies which are essential for stability in world oil markets are continuing without any interruption.
OPEC has already held a meeting with Russia to co-ordinate its strategy for the next few months. The earlier intention of reducing output cuts and allowing members to earn higher revenues by raising production will not be possible at this stage. The outlook for oil prices, thus, remains tilted heavily on the side of continued softening over the next year.
For India, the third largest oil importer in the world, there cannot be better news. The lower prices will give a cushion to the exchequer as it begins confabulations for next year’s Budget.
Yet it will have to keep into account the element of unpredictability as any heightening of geopolitical tensions could overturn this comfortable scenario.
(Sushma Ramachandran is a senior journalist.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.