Ahead of the OPEC meeting on December 6, the crude oil prices surged on expectations of supply cuts by the oil cartel.
Investor sentiments are tied up to virtually every conceivable factor from global crude oil prices to results of impending elections.
On December 3, Indian Express reported that the strength of the Sensex, Nifty had ended flat over weak rupee and macro data. Macroeconomic data, as you know, is based on the examination of factors such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and more.
And this week, many news sources have also cited IANS (Indo-Asian News Service) to report that after opening over 200 points higher over signs of easing US-China trade tensions, rise in global crude oil prices, domestic factors including disappointing macroeconomic data and uncertainty over state elections in Rajasthan have weighed investor sentiments.
Also, ahead of the OPEC meeting on December 6, the crude oil prices surged on expectations of supply cuts by the oil cartel.
In this Moneycontrol Deep Dive, we will try and understand the impact of the OPEC summit on Indian economy but the basic question first.
What exactly is the OPEC cartel all about?
OPEC is the Organisation of the Petroleum Exporting Countries and it is an intergovernmental organisation of 15 nations, founded in 1960 in Baghdad by the first five members ( (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria. The 15 countries account for an estimated 44 percent of global oil production and 81.5 percent of the world's "proven" oil reserves. No wonder then that OPEC wields a powerful influence on global oil prices. And by default, on global economies.
What to expect at the OPEC summit?
The Guardian says that the cartel, which meets on December, could cut over 500,000 barrels a day to reflect forecasts for a slowing global economy. However this time there is more at stake than just oil prices.
The politics over the murder of journalist will shadow the proceedings and Brian Youngberg, an energy analyst for Edward Jones tells The Guardian that the murder may have cost the Saudis some leverage on what to cut and how much.
And like everything else in the current geo-political landscape, the oil prices too have been unpredictable.
We quote, "Two months ago things looked very different. US crude prices touched three-year highs at $77 a barrel, and some oil traders were betting that prices could reach triple digits in 2019. Prices are down 30% from there. The global benchmark, Brent crude, also fell about 30% and is hovering near $59. Even in the notoriously volatile energy markets, the price swings were stunning. Mark Lacey, head of commodities and resources at Schroders, says several events caused prices to fall. He added the oil market is at a critical juncture." Unquote.
The politics over oil is a never-ending saga. As the piece informs us, in 2016, OPEC pursued market share rather than price stability, hoping to hurt the fledgling US shale oil industry by flooding an already oversupplied oil market. US and Brent values eventually fell under $30. We quote, "Global inventories were finally mopped up this year after Opec and Russia tempered production, allowing prices to rebound amid increased demand in a stronger global economy." Unquote.
Nothing happens, as is obvious by now, in isolation in economics. And everything impacts everything else, as we said before so one event that could have major impact on oil prices globally and on India is the departure of Qatar from OPEC.
Qatar announced on Monday that it was walking away from OPEC, supposedly because it wanted to focus on its gas industry rather than on oil, in which it was, in any case, a small player. Qatar ’s wealth is mainly derived from its natural gas reserves, and it is the world’s largest exporter of liquefied natural gas (LNG).
The unstated reason for this break according to many observers is however that the tiny but influential country wants freedom from Saudi control and the official statement from the country does hint at this, and we quote, "we’re not saying we’re going to get out of the oil business, but it’s controlled by an organisation (OPEC) managed by a country”. Unquote.
In hindsight, the break seems inevitable because if you recall, on June 5, 2017, Saudi Arabia, UAE, and Bahrain had cut ties with Qatar, and had even directed Qatari citizens to leave within 14 days, even forbidding their citizens from going to or staying in Qatar. Saudi had also sealed Qatar’s only land border, and closed its ports to Qatari-flagged ships, recalls The Indian Express.
But cut to the present.
How will Qatar’s departure from OPEC impact global oil prices?
Qatar’s oil output may not be substantial but it has historically had an important mediatory role in deal-making. Will its absence have an impact on how far-reaching deals are cut this time, we don’t know at the moment. But its position as one of India’s oldest LNG suppliers will remain unaffected.
However there are other factors that have impacted oil prices in recent times. Factors that have nothing to do with oil.
The politics of sanctions
Donald Trump’s sanctions on Iran also have had a waxing and waning impact on oil prices because as The Guardian says, the White House has had to issue waivers on the Iranian sanctions to key users like China and India, putting extra oil on the market and then the dynamics started to change. Forecasts for slowing global growth suggested oil demand might soften, too. Traders began to sell their bets for higher prices, and prices tumbled.
From too little supply, the global markets were now dealing with a surfeit.
The Guardian quotes Derek Leith, global oil and gas tax leader at EY, who says that the market was caught off guard both by the price rise to $80, which led to ideas of even higher prices, and then the decision to allow sanction waivers, causing the whipsaw action.
As for the OPEC meet, experts are expecting a cut in the output, and are forecasting prices to rebound from current levels.
But there are voices of doubt as well.
Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions has told The Guardian that not everyone is convinced OPEC will cut because prices haven’t been down for long enough, and the Saudis will want a better handle on future demand.
Others say that OPEC would want to balance oil output in a “sustainable way” between making money to allow investment and not squeezing consumers.
Impact on the Indian economy
Despite, recent highs and lows in the oil prices, moneycontrol.com has reported in recent times that there could be a lasting silver lining for India in all of this.
We quote, “Crude oil prices and rupee are two big factors which impact the macros of India. And, both, which were acting as a headwind for the economy and markets, have turned into a tailwind so far in the month of November.
Brent prices were in an upward trend since June 2017 as it rallied by about 97 percent from a low of around $44 to a high of almost $87 in the international market. But, has now corrected by about 30 percent to slip below $60/bbl to hit a one-year low.
Crude oil prices have erased all the gains for this year. This a major benefit to India.” Unquote.
The report cites a Kotak Securities' note that goes on to explain how lower oil prices mean lower imported inflation, lower subsidy burden for the government and lower cost of transporting goods as also providing a boost to the real disposable income of households.
Kotak Securities decisively conclude that lower oil prices support low inflation and high growth. This helps to attract foreign capital flows into India, in the debt and equity markets, and hence it is positive for the rupee.
It also incentivises carry trade as real interest rate differential between India and others becomes attractive, which adds fuel to Long INR trade.
We quote from the report, “Carry trade can be done by owning Indian GOI Securities or corporate bonds or even it can be simply selling USDINR long forwards and then rolling it down. In either of the case, it exerts downward pressure on USD and upward pressure on the Rupee.” Unquote.
Factors driving crude prices
Moneycontrol Contributor and the director- commodity & currency at IndiaNivesh Commodities, Manoj Jain writes, “There are a number of factors that are driving crude oil prices in the international market and we have to analyse both sides of the coin.
Looking at the production side, global oil production reached a record level as US crude oil production jumped by almost a quarter this year to a record 11.7 million barrels per day, largely because of a surge in shale output.” Unquote.
Add to the overflow, the increased production by Saudi Arabia and Russia, the restoration of supplies from Venezuela and Libya and it is clear that global supply seems to be higher than the consumption.
India's oil import reached the highest recorded level of 5 million barrels per day and all these factors are key in supporting prices at the moment.
Jain also addresses the concern on global consumption growth (down to 1 percent from 1.3 percent earlier), Brexit deal and Italy budget issues and expects crude oil prices to remain under pressure in the near future.
He writes, “Last but not least, the risk premium of Brent crude will also narrow as compared to WTI in the coming weeks as possible geopolitical tensions ease off and could also affect the risk premium of Brent adversely.
Any 'dead cat' bounce in the prices toward $66-67 will be a great opportunity to go short again in Brent for a possible downside target of $60-58.” Unquote.
All eyes on OPEC for now
Nothing however is certain in either geo-politics or world economics and markets are anxiously eyeing the forthcoming OPEC meet and its stand on oil production cuts. Ravindra V Rao of Anand Rathi Commodities also told Moneycontrol that going ahead, crude oil may be extremely volatile as uncertainty prevails over OPEC's stance regarding the recent collapse in prices of crude oil and the steps OPEC would take to counter the fall.
He says, “Reports say OPEC might cut production by 1-1.4 million b/d. However, it will be important to see OPEC’s actual quantum of production cut. Disagreement remains regarding how many countries would join this production cut. Saudi Arabia has made it clear that it won’t cut oil output on its own to stabilise markets. Nigeria has signalled that it may not cut production while Libya has sought an exemption (Both countries did not take part in the previous output cut).” Unquote.
So nothing is a given and as we said before geo-political tension has added to the potential volatility. We quote, “The US stands by Saudi Arabia following the alleged murder of journalist Jamal Khashoggi by Saudi agents. Hence, there is also apprehension that Saudi Arabia may not go in for a large production cut and risk upsetting Trump. Over time, Trump has asked OPEC not to cut production and further lower crude oil prices. “ Unquote.So a lot hinges on the forthcoming OPEC meeting , including the well-being of markets in India. Stay tuned to Moneycontrol podcasts for more updates.