DH Deciphers | Crude oil: This should fuel some thought

Are oil prices rising?

Brent crude prices in the international markets have been on the rise in the past several months. In the first four months of calendar 2019, Brent crude price has shot up by about 32%. Crude oil is in the range of $71-72 a barrel currently, and some expect it to rise further, perhaps even touching $100 a barrel.

 

Are they expected to rise further?

Crude prices have surged in 2019 primarily because OPEC countries cut supplies to firm up the price. They are expected to rise further because of the political crisis in Venezuela and the US tightening sanctions on Iran. As on date, Iran produces four million barrels of crude daily, and Venezuela about 2.3 million barrels. With US sanctions on the two countries, daily global supply of crude has dropped by nearly 8%. Meanwhile, Saudi Arabia and the OPEC have not shown much inclination to make up for the shortfall. US could step up its supplies, but it’s unlikely to do so in a big way, at least until prices rise beyond $80 a barrel.

 

How high could oil prices go?

Some analysts think that the world has already seen ‘peak oil price’ and we will never again see anything much beyond $80 a barrel. Also, with world growth expected to slow down further, demand for oil is unlikely to rise. So, we may be looking at a peak of $80 or so. However, in response to US sanctions, Tehran has threated to block the Strait of Hormuz – the only sea route in and out of the Gulf and which accounts for 20% of global oil traffic. The resulting tensions could well push up oil prices much higher than $80 in the short-term.

 

How will rising oil price impact India?

Since about July 2014, India has benefitted from low international oil prices, which had peaked at over $110 a barrel during the UPA-2 regime. Low oil prices between 2014 and late 2018 helped the Modi government keep the current account deficit (CAD) and inflation under check even while imposing high excise duties and earning revenue to keep the fiscal deficit under control. If the oil prices go up, even to the level of $80, India’s spending on oil imports will go up. That will cause the CAD, which is already inching up, to rise. Higher CAD will weaken the rupee and could set off a vicious cycle of factors that will push economic indicators down.

 

What could be the impact on the common man?

Fuel prices are being kept in check in election season. The government may not do so beyond May 19. If fuel prices at the pump rise, so will inflation. Overall inflation is currently low, but it is mostly due to depressed food prices. Even so, inflation is already inching up, and could rise high with the fuel price. That, in turn, could force the RBI to stop cutting interest rates, perhaps even reverse the 0.5% cut effected since January. That could make loans costlier, and push up EMIs. It could also hurt economic growth.

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