Moneycontrol
Oct 30, 2017 07:11 PM IST | Source: Moneycontrol.com

As OPEC nations rest their rigs, India on a slippery slope

High oil prices mean India imports inflation which would give an already hesitant Reserve Bank of India an excuse to delay rate cuts further. The government would like lower oil prices especially since important states are going in for election.

Shishir Asthana
 
 
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Brent crude oil prices have tested the USD 60 a barrel mark leading to an uptick in the target by analysts and raising hopes for a pickup in activity in the oil world. India and other oil importing nations are clearly unhappy with the development as it completely changes the domestic economic scenario.

Uday Kotak, CEO of Kotak Mahindra Bank, tweeted that oil above the USD 60 reduces the fiscal space and dims the chances of a rate cut, especially since US interest rates are high.

High oil prices mean India imports inflation which would give an already hesitant Reserve Bank of India an excuse to delay rate cuts further. The government would like lower oil prices especially since important states are going in for election.

The way things stand it does not look like the government will get any help from the oil market. Fundamental tail-winds are pushing oil prices higher. A higher growth rate posted by US economy saw oil price pierce the USD 60 a barrel mark.

To add to the bullish sentiment, both Russia and Saudi Arabia have said that they would like to continue with the restrictions. President Vladimir Putin of Russia had said that the extension of the curbs should run through at least the end of next year. Saudi Crown Prince Mohammed bin Salman has been reported as saying that he wanted to prolong the Organization of Petroleum Exporting Countries (OPEC) production curbs into 2018.

The oil market has taken the continuation of a cut in production as a done deal. The prolonged production cut throughout 2017 led to a reduction in lowering of inventories despite higher output from the US. But oil markets were helped from disruptions in Iraq in recent months. However, with Iraq commissioning a new port, oil production will be restored soon.

What seems to have surprised the market is the compliance level of OPEC countries which has been reported at well over 90 percent. Higher oil prices have helped all oil producing countries improve their financials. Take the case of Saudi Arabia which had a fiscal deficit of 17.2 percent when oil prices slipped sharply. This deficit is now likely to be 9.3 percent this year, helped largely by rising oil prices.

All OPEC nations have benefited from the rise in oil prices, but one of the biggest beneficiaries have been the shale oil producers in the USA who have made the country a net exporter. Higher oil prices incentivize them to increase production and commission new rigs.

But there is one key development that is likely to keep oil prices high, at least for a while, much to the dismay of the Indian government.

Saudi Arabia’s largest oil company Saudi Aramco is coming out with the mother-of-all initial offerings which will value the company at USD 2 trillion. Saudi would like to keep oil prices higher until the time the issue goes through as higher oil prices increase the profitability of the company.

Saudi Arabia has foregone market share in its home ground – Asian market to Russia and even USA -- in order to keep oil production in check which in turn keeps oil prices higher. The country may be confident of regaining this share later as logistics plays an important part in the pricing of oil.

For the government of India, this does not augur well as not only will the central bank be hesitant in reducing rates, a big chunk of government money will be used in cushioning the ill-effects of higher oil prices. It thus becomes imperative that other engines of growth like private sector, small and medium enterprises start firing as government’s own engine will be sputtering as oil prices rise.

For more research articles, visit our Moneycontrol Research Page.
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