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Last Updated : Oct 19, 2018 09:57 AM IST | Source: Moneycontrol.com

Despite a cut in global growth forecasts, this is why crude oil continues to pinch pockets

The prices of crude oil continue to increase as it is influenced by several covert and overt factors that economies across the world leverage to their advantage.

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Crude oil prices have been rising since the beginning of the year, even managing to reach record highs that were last seen in November 2014. What is surprising is that the rise continues despite the International Monetary Fund’s (IMF) recent downgrade in the global growth forecasts for 2018 and 2019. Read on to know more about this counter-intuitive trend. (Image: Reuters)
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Crude oil prices have been rising since the beginning of the year, even managing to reach record highs that were last seen in November 2014. What is surprising is that the rise continues despite the International Monetary Fund’s (IMF) recent downgrade in the global growth forecasts for 2018 and 2019. Read on to know more about this counter-intuitive trend. (Image: Reuters)

Supply | While most of the world runs on the energy released from burning the black gold, not every country is privileged enough to find a steady supply under its crust. The Organization of the Petroleum Exporting Countries (OPEC) is responsible for about 40 percent of the world’s oil supply and 60 percent of the oil traded globally. (Image: Reuters)
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Supply | While most of the world runs on the energy released from burning the black gold, not every country is privileged enough to find a steady supply under its crust. The Organization of the Petroleum Exporting Countries (OPEC) is responsible for about 40 percent of the world’s oil supply and 60 percent of the oil traded globally. (Image: Reuters)

Geopolitical Disruptions | The imbalance in the distribution of oil means that geopolitical events play a big role in its supply and the market sentiment. Iran, the third largest supplier of oil in the OPEC countries, is set to face a new round of economic sanctions from November 4 after US President Donald Trump withdrew from the 2015 nuclear accord in May earlier this year. (Image: Reuters)
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Geopolitical Disruptions | The imbalance in the distribution of oil means that geopolitical events play a big role in its supply and the market sentiment. Iran, the third largest supplier of oil in the OPEC countries, is set to face a new round of economic sanctions from November 4 after US President Donald Trump withdrew from the 2015 nuclear accord in May earlier this year. (Image: Reuters)

Speculation and Market sentiment | Speculation, and the use of market instruments such as hedging, lead to a spike or dip in prices. Brent crude is the benchmark for global oil prices, whereas Western Texas Intermediate (WTI) crude is another benchmark for oil futures that is focused on North America. A difference between the spot prices and the future prices reflects the sentiment of investors. It is for this reason that oil prices hit a four-year high of $86.74 a barrel earlier in October, as the market grapples with the expected loss of Iranian exports due to the US sanctions. (Image: Reuters)
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Speculation and Market sentiment | Speculation, and the use of market instruments such as hedging, lead to a spike or dip in prices. Brent crude is the benchmark for global oil prices, whereas Western Texas Intermediate (WTI) crude is another benchmark for oil futures that is focused on North America. A difference between the spot prices and the future prices reflects the sentiment of investors. It is for this reason that oil prices hit a four-year high of $86.74 a barrel earlier in October, as the market grapples with the expected loss of Iranian exports due to the US sanctions. (Image: Reuters)

The ripple effects on India | India imports close to 80 percent of its crude oil demand, and is the largest importer of oil from Iran, followed by China and Turkey. If India secures a waiver from the sanctions imposed by the US, it would continue purchasing crude oil from Iran. This would likely reflect as a dip in the oil prices. (Image: Reuters)
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The ripple effects on India | India imports close to 80 percent of its crude oil demand, and is the largest importer of oil from Iran, followed by China and Turkey. If India secures a waiver from the sanctions imposed by the US, it would continue purchasing crude oil from Iran. This would likely reflect as a dip in the oil prices. (Image: Reuters)

Throwing one’s weight around — International relations | The recent disappearance of Saudi journalist Jamal Khashoggi from a Saudi consulate in Istanbul has had far-reaching consequences. Allegations from the Turkish government of a planned murder of Khashoggi (a fierce critic of Saudi Arabia’s policies and administration) by the Saudi establishment surfaced that led to a support in oil market prices amid growing US tensions with Saudi Arabia. It has stoked fears that Saudi Arabia may reduce its output to raise oil prices further. Saudi Arabia accounts for close to 10 percent of the world’s oil supply. Thus, state-run oil giant Saudi Aramco can throw around its weight if need be, with its public statements on the supply of oil having the power to alter prices. (Image: Reuters)
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Throwing one’s weight around — International relations | The recent disappearance of Saudi journalist Jamal Khashoggi from a Saudi consulate in Istanbul has had far-reaching consequences. Allegations from the Turkish government of a planned murder of Khashoggi (a fierce critic of Saudi Arabia’s policies and administration) by the Saudi establishment surfaced that led to a support in oil market prices amid growing US tensions with Saudi Arabia. It has stoked fears that Saudi Arabia may reduce its output to raise oil prices further. Saudi Arabia accounts for close to 10 percent of the world’s oil supply. Thus, state-run oil giant Saudi Aramco can throw around its weight if need be, with its public statements on the supply of oil having the power to alter prices. (Image: Reuters)

The trend of oil prices and the stock market | Above is a graph plotting the monthly spot prices of Brent crude with the BSE Sensex over a ten year period. It can be clearly seen that the stock markets and crude oil prices generally run in tandem, aside from a sharp drop in oil prices towards the end of 2014. A rise in crude oil prices motivates the more affluent of the OPEC nations to use the rise in oil revenues to spur further growth, and commission industries to take on new projects. This sort of spending has a ripple effect on industries across borders, which reflects as gains in the market.(Source: Reuters and ACE Equity)
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The trend of oil prices and the stock market | Above is a graph plotting the monthly spot prices of Brent crude with the BSE Sensex over a ten year period. It can be clearly seen that the stock markets and crude oil prices generally run in tandem, aside from a sharp drop in oil prices towards the end of 2014. A rise in crude oil prices motivates the more affluent of the OPEC nations to use the rise in oil revenues to spur further growth, and commission industries to take on new projects. This sort of spending has a ripple effect on industries across borders, which reflects as gains in the market.(Source: Reuters and ACE Equity)

The way ahead? | As oil prices hit $80 per barrel in recent months and with global oil inventories shrinking fast, Saudi Arabia and Russia agreed to ease restrictions although they never said the exact levels they would target. Amid the rising geopolitical tensions, these measures should provide some relief in crude oil prices in the coming future. (Image: Reuters)
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The way ahead? | As oil prices hit $80 per barrel in recent months and with global oil inventories shrinking fast, Saudi Arabia and Russia agreed to ease restrictions although they never said the exact levels they would target. Amid the rising geopolitical tensions, these measures should provide some relief in crude oil prices in the coming future. (Image: Reuters)

First Published on Oct 19, 2018 09:53 am
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