An increase in crude oil prices is not sustainable beyond $80 per barrel amid weak China growth and a slowdown in the global economy, said analysts.
Analysts have also attributed the recent spike in prices to supply disruptions in Libya and Nigeria and expect the impact to be temporary.
"The global economy is still in the midst of a slowdown, and China’s growth has been lower than expected. Despite the supply cuts, we don’t see a reason for prices to rise in a sustainable way. Moreover, the US is one of the major producers, and their production is quite steady. US production may increase further if prices increase. These are reasons why prices increased to over $80 per barrel in recent weeks but immediately corrected and are now around $79," said Suman Chowdhury, Chief Economist & Head of Research, Acuite Ratings & Research.
Crude oil prices have gained momentum in recent weeks amid supply cuts from Saudi Arabia and easing inflation in the US.
The price of crude oil has been hovering around $80 per barrel in July, having traded below $75 per barrel since the beginning of 2023.
Prices have jumped on account of several reasons, including supply cuts from Saudi Arabia — the world’s largest crude oil producer, — and Russia.
Saudi Arabia has implemented an additional production cut of one million barrels per day (bpd) from July 2023. Besides, the Organisation of the Petroleum Exporting Countries and its allies, commonly known as OPEC+, had, in May, cut oil production by 1.6 million bpd.
In the May cuts, Saudi Arabia had reduced supply by 500,000 bpd, while Iraq had cut over 200,000 bpd until the end of the year. Russia, which is part of OPEC+, had announced an extension of its production cut of 50,000 bpd till the end of 2023.
Besides the supply cut, crude oil prices are also trading higher on account of easing US inflation and supply disruptions in Libya and Nigeria.
Domestic brokerage Sharekhan said, "We are bullish on crude oil, and the rally, which picked up in the last two weeks, will likely continue, as fundamentals are shifting fast due to broader supply concerns over disruptions in Libya and Nigeria and hopes of higher US crude demand amid cooling inflation. The outages in African countries could amount to a wiping of 300kbpd-400kbpd, which could tighten the market after OPEC+ is already squeezing supplies by 5 percent of global supplies. Meanwhile, OPEC continues to remain bullish on global oil demand, as it sees 2024 demand rising by 2.2 percent.
"On the macro front, the US economy is gaining traction with inflation gradually drifting towards the Fed’s comfort level, which has raised the bets for the end of the interest rate hike cycle in the US. China’s crude oil imports, which rose 45.3 percent in June year-on-year (YoY), are also supporting the bullish momentum. We expect WTI to soon trade above $80, supported by Asian demand," the brokerage added.
The International Energy Agency (IEA) has predicted global oil demand to climb by 2.2 million bpd in 2023 to reach 102.1 million bpd, a new record.
"Even so, global oil demand is set to rise seasonally by 1.6 mb/d from 2Q23 to 3Q23 and to an average of 102.1 mb/d for the year as a whole. Growth will slow to 1.1 mb/d in 2024 as the recovery loses momentum and as ever-greater vehicle fleet electrification and efficiency measures take hold," said the IEA in a recent report.
An increase in global crude oil demand and production cuts from OPEC would favour crude oil prices in the second half of 2023.
Impact on India
International crude oil prices directly impact India, as the country is a net importer of crude oil, with over 85 percent of its requirements being met by imports.
Due to rising oil prices, the Indian government, on July 15, reimposed the windfall tax on domestic production of crude oil after a gap of two months.
The windfall tax was reduced to nil in the last two months as the Indian basket of crude price averaged $74.98 per barrel.
Additionally, Indian consumers have been reeling under the pressure of high fuel prices. If crude prices rise again, consumers in India may not see a reduction in fuel prices as oil marketing companies (OMCs) might not lift the freeze on petrol and diesel prices.
"Crude prices are on a rising trend of late. A few OMCs may take a call, depending on the price trend. OMCs are not booking losses currently, but their marketing margins are not quite high. So, we might not see a cut in fuel prices," said Prashant Vasisht, VP and Co-Head, Corporate Ratings, ICRA.
OMCs have left petrol and diesel prices unchanged since April 2022.
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