OPEC+ keeps output target unchanged. MC explains its impact on India

High crude oil prices are a huge burden to the Indian economy as the country relies on imports for a major portion of its requirements.

Amid elevated crude oil prices, the Organisation of Petroleum Exporting Countries and its allies (OPEC+) decided on April 3 to keep the group’s output unchanged, pushing prices higher still.

On April 4, crude oil prices rose to $89 a barrel due to worries about tight global supply and added concerns over attacks on Russian oil infrastructure and tensions in the Red Sea, a key transit channel for seaborne petroleum trade. OPEC+’s ministerial committee—Joint Ministerial Monitoring Committee (JMMC)—has confirmed that the group’s output would remain unchanged till mid-2024 while urging some nations to cut production to comply with the output policy.

High crude oil prices constitute a huge burden to the Indian economy as the country relies on imports for a very significant portion of its energy needs. Moneycontrol takes a look at OPEC’s recent decision and its impact on crude oil prices in general and on consumers in India in particular.

What has the OPEC committee decided?

OPEC’s JMMC on April 3, while confirming it would maintain its lowered  supply till the end of June, said it “noted high conformity” of the participating countries for complying with the output cuts. To be sure, OPEC+ had earlier decided to extend voluntary oil supply cuts of 2.2 million barrels per day into the second quarter of 2024.

Saudi Arabia—the de facto leader of the group—had extended its voluntary cut of 1 million barrels till mid-2024 while gathering support from countries including Russia and Iraq.

The committee also welcomed pledges by Iraq and Kazakhstan to comply with the output policy decided by the group and compensate for the previous overproduction by the two countries in the coming months. Meanwhile, Russia announced that its voluntary adjustments in the second quarter of 2024 would be based on production instead of exports.

What was the immediate impact on crude prices?

Subsequent to the OPEC meeting, crude oil prices rose on concerns about tighter supply at a time when demand from China—the largest energy consumer—was improving. On April 3, the benchmark Brent crude closed at the highest levels since October at over $89 a barrel.

So far in 2024, crude oil prices have remained elevated due to tighter supply but also shipping risks and attacks by Ukraine on Russian energy infrastructure. In the first quarter of the calendar year, crude prices gained 16 percent and now stand at a six-month high, with Brent above $89 and WTI, the US benchmark, breaching $85 a barrel level for the first time since October last year.

What would be the impact on India?

The Indian economy remains sensitive to fluctuations in crude oil prices as the country imports around 87 percent of its requirements from oil-producing nations such as Russia and Saudi Arabia. India’s oil secretary Pankaj Sharma on April 2 said rising crude oil prices are a cause of concern.

The comment from the official comes after oil marketing companies (OMCs) in the previous month had slashed petrol and diesel prices by Rs 2 per litre nationwide. The oil marketers had frozen daily price revisions since April 2022, prior to which they had increased prices by a total of almost Rs 10 per litre due to soaring crude prices.

With crude prices nearing $90 a barrel, a further reduction in retail prices seems difficult as OMCs are selling diesel at a price lower than the actual cost of production. Sharma said if oil prices continue to stay elevated for a month longer, these companies would take an appropriate decision on retail fuel prices.

Where are crude prices headed now?

Analysts and energy experts remain bullish on crude oil prices considering the driving factors currently. Brokerage Sharekhan expects prices to show a strong performance in the second quarter of 2024 as well, buoyed by the growing geopolitical rifts in the Middle East and OPEC+ managing strong compliance of crude oil production targets.

The escalation of the conflict between Ukraine and Russia and tensions between Israel and Hamas, with its implications on the Red Sea, have also pushed up crude prices.

Sharekhan said in a note that global manufacturing activities expanded across the board in March, which should be a strong enough reason for prices to maintain the bullish momentum.