Cloudy future

Higher oil prices increase risks for India

The last quarter was a particularly strong one for crude oil prices. The commodity increased more in price over the past three months since the initial shock it received at the time of the Russian invasion of Ukraine. Since the end of June, when the price of a barrel of West Texas Intermediate crude was around $70, it has risen steadily to $90-95 in recent days. The initial spark for the rally came when the Organization of the Petroleum Exporting Countries (Opec), together with some other large non-Opec exporters such as Russia, agreed to cut supplies even as demand was rising. Last week, oil hit a new record for the year, of over $95, when officials in the US noted that commercial inventories of crude oil in the country had fallen to their lowest level in the year.

The combination of supply and demand in the oil sector over the coming two quarters is, however, particularly hard to predict. Some analysts believe three-figure prices for a barrel of oil are on the horizon; others say that, even if those heights are scaled, such high prices are not sustainable, given the demand patterns. There are several unknowns in these equations. One of these is the behaviour of large exporters, particularly Saudi Arabia. The kingdom has extended unilateral supply cuts till the end of the year, which suggests that it has no intention of giving up on actively managing the supply to keep prices high. The Iraqi prime minister had said in the past that Opec believed a fair price for a barrel of crude oil was “not less than $85 to $95”. On the other hand, geopolitical pressures on Riyadh — especially from a US that is entering election year — might cause it to loosen its hold on supply.

Demand is equally complex. On the one hand, worldwide consumption has been strong. On the other hand, consumer behaviour may be responding more elastically to prices than in the past; some wonder whether, after the pandemic, individuals and businesses are more able to cut down on non-essential travel and mobility than before the work-from-home age. In addition, interest rates in the US are on the high side, which leaves less room for speculation. Finally, there is China. While the initial demand surge caused by the country’s reopening after its failed pursuit of Covid Zero may have died off, it has barely begun to tap an enormous strategic reserve, built up over the past years.

For Indian companies, the central bank, and the Union finance ministry, this uncertainty is deeply concerning. India is due to continue increasing its consumption of crude oil. Prices have remained generally under control, thanks mainly to the rise in imports from Russia, which have few other destinations. Flows of crude oil from Russia’s three western ports of Primorsk, Ust-Luga, and Novorossiysk rose to 2.15 million barrels a day in September. Of the over 8 million tonnes exported from these ports, India was due to receive 3.3 million tonnes, as distinct from under 500,000 tonnes for China and less than a million tonnes for Turkiye. Domestic oil-marketing companies have kept the prices steady for over a year but elevated crude oil prices and political compulsions to reduce pump prices in the coming months could complicate macroeconomic management.