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Moneycontrol Pro​ Panorama | Crude on the boil, scalds equity markets

In today’s edition of Moneycontrol Pro Panorama:​ Crude oil worries, windfall tax, Laurus Labs, GST rate hikes, Home First, Strategy lab and more

July 01, 2022 / 08:12 PM IST
(Representative image)

(Representative image)

Dear Readers,

The global oil market is on fire with little in terms of a solution in sight. It is not only crude oil but also natural gas and related product segments that are witnessing volatility on account of various factors.

Let’s first look at the crude oil market. The oil cartel OPEC+, after a meeting, decided to stay the course with its production policy. The group will increase monthly overall production for August by 648,000 barrels per day.

Markets were expecting that OPEC+ would increase production over and above its scheduled target. OPEC, in its previous meeting, had decided to increase output by 648,000 barrels per day in both July and August.

OPEC+, as a conscious decision, has been slowly increasing production to nearly 10 million barrels per day, a level that will bring it back to pre-Covid levels.

However, despite these increases, there are doubts in the market that OPEC is running out of oil.

The number of completed wells at OPEC producers dipped by 280 compared to 2020 and stood at 1,588 wells completed in 2021. This was the lowest number of well completions since at least 2017.

All major producers, including Saudi Arabia, Iraq, the United Arab Emirates (UAE), and Kuwait, saw the number of completed wells drop last year.

Ahead of the OPEC+ meeting Shell CEO, Ben van Beurden, said “We are seeing an ever tighter oil and gas market appearing — and we are feeling that right now. I think it is probably fair to say there is a little bit of a fear factor in the oil price at the moment but by and large, it is also true that there is limited spare capacity.”

Earlier in the week, French President Emmanuel Macron said he had been told by the UAE’s president that both the UAE and Saudi Arabia could barely increase oil production.

Macron was heard telling Biden on the sidelines of the G-7 summit that UAE leader Sheikh Mohammed bin Zayed al-Nahyan told him that the country was already at maximum production capacity, while OPEC kingpin Saudi Arabia could only increase by around 150,000 barrels per day.

To add to the limited capacity, there is some oil producer or the other which is in trouble. Presently, there is a suspension of Libyan oil exports from key ports and an ongoing protest in Ecuador that has reduced oil output.

While the crude oil market is feeling the heat, natural gas and downstream product markets are in the middle of an inferno.

Russia cutting supplies to some European countries and logistical bottlenecks have resulted in spiraling gas prices globally.

As for product prices, limited refining capacity and a surge in demand have led to an increase in fuel prices. Gross Refining Margin (GRM), the spread between crude oil and the finished product in Asia, recently touched a record $30 per barrel.

Some swift-footed Indian refiners diverted their products from India to export markets to take advantage of the arbitrage opportunity.

To prevent this movement of fuel, the centre slapped a Rs 6 per litre tax on exports of petrol and ATF and Rs 13 per litre on exports of diesel earlier today.

The government also wants to capitalise on the bullishness in the oil market by increasing taxes on drilling. It has imposed Rs 23,230 per tonne additional tax on domestically produced crude oil to take away windfall gains accruing to producers from high international oil prices.

The way things stand in the oil market, supply side constraints are likely to continue for a while, which will keep inflation and interest rates high, both of which are not conducive for equity markets. 


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Shishir AsthanaMoneycontrol Pro
Shishir Asthana
first published: Jul 1, 2022 08:07 pm