COMMENT- India could find itself in a sweet spot as oil market turns volatile

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Shishir AsthanaMoneycontrol Research

Like a school bully, U.S. President Donald Trump seems to be picking up a fight with every country on the planet. While it might win him brownie points among his supporters, the unpredictability of his actions is causing far-reaching collateral damage globally.

For one, the confrontationist attitude shown by the US government has rattled world currency markets.

Argentina is already seeking a rescue package from the IMF after the peso lost a quarter of its value against the dollar. Brazil has seen its currency drop by 15 percent against the dollar, which along with rising oil prices has resulted in truckers staging strikes against rising costs.

Among the other currencies that have taken a hit are the Mexican peso which is down by 8.6 percent, the Russian ruble, down nearly 8 percent, our own rupee, down 6 percent, and the South African rand, down 5.9 percent. Rising interest rates in the US are adding to the strength in the dollar; some of the other countries are having to raise interest rates to protect their currencies against the rampaging greenback.

Rising interest rates in a country generally affects growth which in turn should impact oil consumption. A strong dollar conventionally hurts oil price.

For oil markets, a strong dollar is just one of the reasons to worry. The other, more immediate ones are the meeting of the OPEC cartel and the trade war between the US and China.

The world's top oil producers, who form the Organisation of the Petroleum Exporting Countries (OPEC), and other exporters like Russia, are meeting at the end of this week to discuss further production cuts to control oil prices. There is an existing agreement between these nations to curtail output by 1.8 million barrels per day.

The cartel, which surprisingly obeyed the production cut for nearly two years, is now likely to break. There is a faction of smaller countries who want to continue with the production cut as they benefit from the rise in oil prices at a time when they are pumping oil at almost full capacity.

On the other hand, countries like Saudi Arabia and non-OPEC-member Russia, who have some spare capacity want to increase production in order to meet regain the ground lost to the US, which has taken advantage of the cuts and started shipping its shale oil into their traditional markets.

Oil analysts were expecting oil prices to touch $100 a barrel mark after Trump imposed fresh sanctions on Iran. With the chaos in Venezuela, the analysts were even considering revising the price higher.

However, the strong dollar seems to have disturbed the assumption as the likely lower demand on account of higher interest rates would mean that oil producing countries would now be struggling to sell their goods in a tighter market.

Russian Energy Minister Alexander Novak said they are considering an increase of as much as 1.5 million barrels a day, which should be enough to offset the supply losses from Venezuela and Iran.

But that is easier said than done as increasing production would not be easy; even if Russia is non-OPEC, it has tended to go with the bloc, which takes unanimous decisions on production cuts or increases. Saudi Arabia’s clout within the OPEC will be put to test over the weekend.

As though the increased anxiety ahead of an OPEC meeting were not enough for the oil markets, a fresh round of ammo fired by Trump has resulted in higher volatility. The US announced it would impose fresh tariffs worth $50 billion on Chinese goods starting from July 6, to which China has threatened to impose duties on U.S. oil imports.

One of the biggest markets for US shale oil was China, which grew sharply over the last two years. Chinese imports of US oil increased from $100 million a month to $1 billion per month.

Clearly, OPEC and Russia want to exploit the opportunity that will be created on account of the tussle between the US and China and it would mean that US  would be desperate to sell oil in other markets.

This may be good news for India and majority of oil demand in the recent past and in the new few decades is expected to come from China and India. If US oil finds it difficult to enter China, it would try to find a way to sell in India, the other main consumer.