JOIN USVolatility to continue in oil markets: Low prices a boon for India
The news that global crude oil prices have fallen to their lowest-ever level for the past ten months will come as some relief to the Finance Ministry as it begins the process of formulating Budget proposals for 2023-24. The fact that benchmark Brent crude prices have dipped to $82 per barrel will cheer policymakers worried about soaring oil prices. These have, in the past, upset well-laid plans to contain the fiscal deficit within manageable limits.
It must be recalled that in the current year’s Budget, all estimates had been based on the assumption that oil prices would hover in the range of $75 to 80 dollars per barrel. These assumptions went completely awry as soon as the Ukraine war broke out at the end of February, leading to prices spurting to $140 per barrel. International oil markets then softened slightly, but prices remained over $100 per barrel for several months. There has been some respite over the past two months, with crude falling to around $85 to 90 per barrel. But volatility continues in world markets owing to geopolitical developments, notably the continuance of the Ukraine conflict and rising Covid inflections along with protests against repressive policies in China.
There are several ramifications of high world oil prices for a country like India that imports over 85 per cent of its fuel needs. The most significant is inflationary pressures from soaring energy prices. This has been one of the key factors forcing the central bank to move towards a series of aggressive rate hikes. The easing of global oil prices in recent months has been reflected in a dampening down of inflation that is currently in the region of 6.77 per cent for October. The Reserve Bank of India is now confident that inflation will come down to a more manageable level of 5.8 per cent by the end of the current fiscal.
In addition, the firming up of world oil prices has led to a widening of the current account deficit. The current account records the value of goods and services imported and exported by a country, along with international transfers of capital. In the case of India, it has been expected that the current account deficit for the current fiscal will cross 3 per cent of GDP, the highest ever for the past four years. One of the reasons has been the high cost of energy imports.
Yet all these projections are now likely to change, with oil prices having moderated to around $82 per barrel. In case markets continue in this softening mode, the mandarins of North Block will find it much easier to juggle the fiscal math for next year.
The situation, however, continues to be complex and uncertain, as it has been throughout this year. The movement of global oil markets in the near term will be dependent on three critical factors. The first is the continuance of the Ukraine war that has created havoc as far as energy security is concerned, both for the North and South. European countries are facing high energy prices and shortages never seen in the recent past, while emerging economies have had to cope with surging oil and gas prices. The second is the situation in China which has been following a zero Covid policy leading to shutdowns in key manufacturing regions. This has been followed by a resurgence of infections in major cities and, finally now, reports of protest demonstrations against the strict movement curbs and the repressive regime. A fall in demand from the world’s biggest oil importer will be one of the key drivers of market fluctuations in the
coming days.
And the third major influence on oil markets will be the next move of the cartel, the Organisation of Petroleum Exporting Countries (OPEC), which is now called OPEC plus, in its alliance with other major producers like Russia. The oil cartel had announced in early October that it would cut output by 2 million barrels per day from the following month. This had immediately led to a spurt in prices on the premise that there would be a shortfall in the availability of oil. The situation has now changed as markets have reacted sharply to the recent revival of Covid infections and protests against the regime in China. Both these developments could slow down growth in one of the world’s biggest economies. This, in turn, would reduce oil demand significantly.
OPEC-plus will thus have to consider its next strategy against this backdrop by its next meeting on December 4 in Vienna. A further cut in output may not achieve the cartel’s aim of firming up prices immediately. Markets are likely to remain volatile in reaction to geopolitical changes, especially the situation in China and the threat of recession posed in many parts of the world.
The softening of world oil prices, even for a few months, is all to this country’s advantage. But any medium or long-term assessment of oil markets is not possible at this stage, given the wide variety of imponderables that could affect their movements. One can only hope that prices continue to show softening trends that will provide support to emerging economies like India, which need assured long-term supplies to ensure energy security.
(The writer is a senior journalist)
(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.')