It is oil, stupid. The one big factor roiling markets across the world is the price of crude oil, which has been spiralling and pushing inflation to record highs.
The price forecast for arguably the world’s most-watched commodity is at par with the wild swings of the equity market—close to $400 a barrel in the worst-case scenario and below $100 in a better situation.
Sunil Singhania, Founder of Abakkus Asset Manager, is firmly in the second camp that believes crude higher production and tapering of demand will cool crude.
He said there were indications of countries like Venezuela, Iran and Iraq increasing production. At the same time, shale oil production in the US was also up compared to the last year.
“There is a possibility that in the next three-four months, 1-1.5 million barrels a day come from shale oil production,” Singhania told CNBC-TV18 on July 4.
“There is a possibility of at least 2-3 percent reduction in demand,” he added, citing high pump rates in most countries.
His comments come at a time when crude prices are hovering upwards of $110. Several Organization of the Petroleum Exporting Countries member have said they don’t have spare capacity to increase production.
The scarcity of oil in the international market is largely due to Western sanctions against Russia, which used to meet a large chunk of the Europe’s energy demand.
Jefferies Global Head of Equities Chris Wood has said the world is overlooking a big trend in its crude oil projections.
“What is perhaps not receiving enough attention is that Russia has been incrementally reducing gas supplies to Europe, most particularly to Germany, to obtain maximum leverage in terms of its bargaining power,” Wood said in his latest newsletter.
“The estimate is that Russia’s gas supplies to Germany have already declined by 60 percent…(this means we are) hearing growing talk of Europe, and European businesses, facing the prospect of energy rationing,” he said.
Such a situation will fan the fire in the international crude market. The situation will worsen if Moscow goes for an output cut.
JP Morgan, in a recent note, said Russia can afford to slash daily crude production by 5 million barrels without excessively damaging the economy, and if that happens, crude can hit $380 a barrel. If the output cut is 3 million barrels a day, prices will soar to $190 a barrel, it said.
Singhania, however, is convinced that crude should come down to $70-80 a barrel. He believes the only reason for it not to fall would be geopolitical issues in West Asia, particularly the UAE and Saudi Arabia, which account for a sizable chunk of India's imports.
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