India's worst fear: Can crude oil prices hit multi-year highs again?

Despite pressure from the US to continue the present supply status quo, Saudi Arabia, the de facto leader of OPEC and other top oil producers have decided to cut the global oil output.

The OPEC members will curb 0.8 million bpd output versus its October levels while the non-OPEC allies will reduce 0.4 million bpd.

Anyhow, a combined cut of 1.2 million barrels per day against an earlier expectation of 1 million bpd will be reflected in the global markets by January.

Though top producers like Iran, Libya, Venezuela, and Qatar are exempted from the supply cut deal, the decision is perhaps to support global prices.

Saudi Arabia, the leading producer in the OPEC, is expected to cut output more than other peers in the grouping. Reportedly, the country would reduce its output to 10.2 million bpd in January, going far beyond a 2.5 percent reduction from its October levels.

The Russia-led non-OPEC allies have also agreed to slash output. Russia is the world’s second largest oil producer, contributing about 10 percent of global production.

Meanwhile, the threat of supply glut is still in the market. Iran, the third top producer of OPEC is now set to push exports by offering larger discounts to its buyers. The U.S imposed sanctions on Iran from November but unexpectedly allowed a broad exemption to major Asian oil consumers which permits them to continue import from Iran.

Earlier, oil exports from Iran fell drastically, about 60-80 percent due to limited imports from key Asian buyers like China, India, Japan, and South Korea.

Presently, export from the country is set to rebound using the waiver from US sanctions. China, the chief importer of Iranian oil started imports in December and Japanese and South Korean buyers are preparing to resume purchase from January. Indian refineries are also planning to buy larger quantities by January after a gap of six months.

Simultaneously, concerns over demand from top Asian markets may weigh prices later. Asia’s largest economy, China has recently reported a slow growth rate.

A decline in manufacturing numbers and a drop in car sales indicates that the trade conflict with the US is starting to add to the strain on the world's largest economy.

The Japanese economy fared poorly in the third quarter due to natural disasters and a decline in exports. A feeble Indian currency would result in higher cost for imports, which may hit demand for oil. Car sales in the country are also expected to register a decline this year.

Looking ahead, a sudden recovery in prices is still on the cards but, the continuing deceleration of economic activity may curtail energy demand later.

Shrinking demand growth and elevating U.S shale production pointed towards an emerging surplus which may also have an adverse impact on market sentiment.

On the prices front, the global benchmark US WTI is likely to turn higher as long as the strong support of $48 a barrel is undisturbed. An unexpected drop below the same would open room for long liquidation pressure.

Disclaimer: The author is Head of Commodity Research at Geojit Financial Services. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.