Moneycontrol Pro Panorama | The oil conundrum surfaces again

A rising oil price scenario only increases the pressure on India’s exchequer.

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With its parting blow, the Joe Biden government has sparked off the crude oil conundrum by imposing sweeping sanctions on Russia’s oil supplies into global markets. The sanctions cover two of Russia’s largest oil producers and exporters and importantly, include 180 plus oil carrying vessels.
To give a sense of the magnitude of harshness of the sanctions, the International Energy Agency estimates that the quantum of oil supply disruption could be larger than the global supply surplus expected in 2025. Oil sector analysts state that the two companies account for nearly 40 percent of Russia’s sea-borne oil exports and about 1.4 percent of global oil demand.

The upshot: Oil prices that displayed an uncanny stability in 2024 are now on the boil again crossing $82 per barrel, which is the highest since July last. Besides, tanker and freight rates are up anticipating a shortage in key routes. Also, crude-linked commodity prices are likely to move up. Gasoline prices, for instance, are reportedly at a 3½-month high. Mind you, all this activity in less than a week since the sanctions.

On top of it, a sudden drawdown of stock and lower crude oil inventories in the US supported the price rise. The hope is that the price rallies could be tempered by higher supply from non-OPEC+ (Organization of Petroleum Exporting Countries) regions and lower demand from China following its slowing economic growth.

However, India accounted for an impressive 25 percent of global oil consumption growth in 2024. With renewable energy taking time to ramp up and the country’s intent to bridge the demand gap for energy through thermal power plants, India’s crude oil imports are not going to ebb soon. This explains why even before the sanctions, refiners in India and China were reckoned to be seeking supplies of Middle Eastern oil in the recent past.

Indeed, a rising oil price scenario only increases the pressure on India’s exchequer, given the country’s import dependence for oil. A report by Angel One estimated that every $10 increase in oil prices increases India’s current account deficit by 0.55 percent and raises the consumer price index by 0.3 percent. What follows? Lower foreign exchange reserves, fall in the rupee and higher fiscal deficit.

Is this good or bad for equity markets? At a macroeconomic level, it is a pain point. Over a long term, if crude oil prices rise and the rupee weakens (India is facing both situations currently), it is known to take a toll on corporate profits. It is particularly negative for sectors such as oil and gas marketing companies, paints, fertilisers and chemicals, auto and aviation. Equity markets will then skid on account of weak profitability indicators.

The question is: Will all these events pan out as expected? For now, it remains unclear how the new order in the US under newly-elected President Donald Trump will approach these sanctions when he takes office next week.

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