Crude oil prices have been on the rise recently, despite the Organisation of Petroleum Exporting Countries and its allies (OPEC+) announcing a gradual phaseout of production cuts, starting later in the year.
Crude oil prices settled for the third straight weekly gains on June 28 and are currently trading over $83 per barrel. On July 1, Brent prices were hovering around $83.61 a barrel.
Moneycontrol takes a look at the recent uptick in crude oil prices and its impact on India.
Why has there been an uptick in prices recently?
The optimism around demand due to the summer season and rising tensions in the Middle East between Israel and Lebanon's Hezbollah have kept crude oil prices elevated. However, crude oil prices were capped on the back of higher inventory in the US.
The Energy Information Administration (EIA), on June 28, said oil production and demand for major products rose to a four-month high in April, which also supported prices.
What did the OPEC announce recently on supply cuts?
The Saudi-led oil cartel, on June 2, decided to continue the voluntary cuts of 2.2 million barrels per day (bpd) till September 2024. Thereafter, the group plans to phase out the supply cuts over a year, i.e. till September 2025, in a monthly exercise. OPEC said the monthly increase in production after September 2024 could be paused or reversed based on the market conditions.
OPEC+ has currently put in place a total production cut of around 6 million bpd. Of this, a production cut of 3.66 million bpd is to be implemented till the end of 2024, while the voluntary cuts of 2.2 million bpd expired in June and have been extended till September 2024.
The decision to phase out voluntary supply cuts after September led to an immediate slump in crude oil prices, which traded below $80 per barrel. However, oil prices recovered later due to demand optimism.
What are the expectations regarding the movement of crude oil prices?
Crude oil is expected to remain elevated in the near term amidst geopolitical tensions and stronger demand than earlier. The market sentiments have turned bullish due to supply tightness as signalled by the steepening backwardation curve. The curve between the current month and front month stands at 0.81 cents, Sharekhan said in a note on July 1.
The weakening US dollar is also supporting oil prices, while the hurricane season in the US has kicked off with Hurricane Beryl on Sunday, the note said. “Oil prices trade higher at $82.02 through the start of July, following nearly a six percent monthly gain in June, driven by the renewed conflict in the Middle East, and it is putting a floor under prices,” said Sharekhan.
Kotak Securities said, on June 27, that the downside remains limited amidst escalating conflict in the Middle East, with tensions brewing between Israel and Lebanon's Hezbollah.
“EIA inventory data released on July 1 showed that US crude inventories increased by 3.591 million barrels during the previous week, defying market expectations for a 3 million-barrel decline. Meanwhile, US gasoline stocks also rose by 2.654 million barrels, but distillate stockpiles went down by 0.377 million barrels,” the brokerage added.
What would be the impact on India?
India, which is dependent on imports for over 85 percent of its total crude oil requirements, would be directly impacted by higher crude prices.
Elevated crude prices impact the performance of state-owned oil marketing companies (OMCs), which control retail fuel prices in the country. OMCs have been reluctant in reducing retail fuel prices in the domestic market, despite booking high profits in recent quarters, citing volatility in oil prices due to the ongoing war in the Middle East and its implications on the Red Sea.
The decision on slashing petrol and diesel prices in the domestic market could be considered, if crude oil prices sustain around $80 a barrel over a sustained period, Minister of Petroleum and Natural Gas Hardeep Singh Puri had said earlier.
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