Joseph Thomas, Head of Research, Emkay Wealth Management
With Brent at $86 a barrel, oil is at multi-year highs. The price of oil and gas has gone up as consumption remains robust and gradually moving up to the pre-pandemic levels. It is expected that the global consumption will touch the pre-pandemic levels and cross it by the first quarter of 2022.
Oil consumption has increased by 5,00,000 barrels per day and there is also some shift or switch by consumers from gas to oil with the crunch gas and the astronomical gas prices. This switch is likely to push up the demand for oil and thereby the price.
According to OPEC estimates, oil demand may go up by 1 million barrels per day in the coming month. But OPEC in its recent meeting decided to not do anything with price or quantity despite the rise in oil prices. They decided to stand by their original decision to increase output by 4,00,000 barrels per day from November onwards.
The rise in prices may be sustained due to the fact that it is happening at the threshold of winter season, a time when the consumption would usually gallop to higher levels, and the intensity of the winter may further alter the situation in favour of higher prices. This situation is going to adversely affect big importers of oil like China and India who have their economies dependent on oil imports.
The rise in oil prices will have major implications for domestic inflation and exchange rate. The local currencies are likely to weaken with implications for the general price level. If not targeted and controlled the current move in oil prices may harm some of the economies which have demand pick-up still in its infancy after the pandemic.
The top five countries in Europe have come together and have sounded an alarm over the high price of oil and gas. But there is very little course available to these countries other than using renewables and alternatives, apart from attaining a higher level of energy efficiency in the coming years, as a measure to combat higher fuel prices.
The probability of the US releasing the strategic petroleum reserves during this time of crunch has been ruled out for the time being. This also afforded some support to the rising prices. While a large number of analysts look at $100 as a potential target, a move to $88 to $90 over the next two to three months cannot be ruled out given the ground level realities.
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