Global oil prices have been softening for the past two months despite continuing geopolitical tensions. The phenomena of lower prices has defied predictions by investment agencies that had forecast oil skyrocketing in 2024. Instead, 2023 is ending with oil markets in bearish mode and the benchmark Brent crude being quoted at a low of 75 dollars per barrel. Unless the situation alters gravely over the next six months, it looks as if Goldman Sachs’ gloomy expectation of crude soaring to 100 dollars per barrel by the end of next year has little chance of becoming a reality.
OPEC Machinations Fail
The current depressed state of oil markets comes after the peak of mid-October when prices had touched 92 dollars per barrel. This was a reaction to the decision by Saudi Arabia and Russia to extend their voluntary output cuts of 1.3 million barrels per day (bpd) for another three months. The momentum of higher rates could not be maintained in the following weeks due to several factors.
The first is the failure to maintain production quotas by members of the oil cartel now known as the Organisation of Petroleum Exporting Countries Plus due to the addition of Russia and other allies to the group. Several members have been exceeding their listed quotas including Iran and Venezuela which are exempt due to the sanctions. Other countries like Angola and Nigeria have felt the need to produce more oil to generate enough revenues for their exchequer.
The differences within the cartel came to light at the recent OPEC plus meeting where African producers were reported to be concerned over the proposed output cuts of 2.2 million bpd scheduled for the first quarter of 2024. The latest visit of Russian President Vladimir Putin to Saudi Arabia indicates the growing concern of OPEC+ leaders over the inability of the cartel to operate as a cohesive unit.
US Shale Output, Muted China Demand
The second significant reason behind softening prices has been the rising output of US shale oil producers. While OPEC+ is cutting back on production, shale oil production has reached record levels of 13.24 million bpd in September. So efforts to create shortages in the market and push up prices have not met with success. On the contrary, there has been a rapid fall in prices of the West Texas Intermediate (WTI) crude from nearly 90 dollars per barrel in early October to 77 dollars by the end of November. It even fell below the 70 dollar barrier over the past few days after rebounding to 71 dollars.
Yet another factor contributing to the dip in oil prices is the growing perception that global demand is set to fall in the coming year. The focus is on China, the world’s largest oil buyer, where imports are reported to have fallen by about nine per cent in November. There are also concerns over sluggish economic growth in that country. Added to that is the recent downgrading of that country’s sovereign debt rating by credit rating agency, Moody’s. Even demand from India, the third largest importer, has been muted in November after rising steeply in the previous month. Simultaneously gasoline inventories are reported to be rising in the biggest oil consumer, the US.
India Benefits
The cooling of world oil markets has taken place in the backdrop of continuing geopolitical tensions including the Ukraine conflict and the Israel-Hamas war. Prices had spiked initially after the West Asian flare up but now there is a perception that this will remain a regional issue and not become a wider war involving other countries. Concerns are thus centring over excess supply of oil into the market given the inability of OPEC+ to contain output along with falling demand in key economies like China, India and the US.
The impact of lower oil prices, however, comes as a bonanza to India which imports over 85 percent of its fuel needs. The oil import bill had risen sharply in 2022-23 owing to the volatility caused by the war in Ukraine. It had gone up from $121 billion in the previous year to $158 billion. But if crude prices continue their softening trend for the next few months, the burden on the exchequer may end up being lower than in the last fiscal.
The outlook is benign from this country’s point of view as prices now look set to remain in the low $80s in the first quarter of 2024. Yet volatility cannot be ruled out given the unpredictability of geopolitical conditions in recent years. Thus for the time being it would be prudent to continue existing policies of diversifying sources of supply by enhancing purchases from Russia and reducing dependence on West Asian suppliers. This approach must be sustained to ensure that the country’s long term strategic fuel security needs are fully met.
Sushma Ramachandran is a senior journalist based in Delhi. Views are personal, and do not represent the stand of this publication.
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