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Crude oil prices are rising again as the oil production group the Organisation of Petroleum Exporting Countries weighs a production cut.
In the quarter ended September, Brent crude prices had fallen by more than 20 percent as fears of a recession loomed. But prices have climbed by close to 3 percent today morning and Brent is nudging $88 a barrel as international publications reported that the Opec ministerial meeting in Vienna this Wednesday could see the cartel cut output by as much as 1 million barrels a day, the sharpest since the COVID-19 pandemic.
Why would OPEC want to cut production? For two reasons, per an FT report. One, is to prop up prices and revenues, and the second, to keep some production capacity in reserve when the US and EU sanctions hit Russian oil in December. The EU has banned sea-borne imports of Russian crude from December 5 and an oil price cap — agreed to by G7 nations — is also likely to kick in.
On the top of this, Saudi Arabia may institute a further unilateral output cut, the FT report said.
The output cuts will squeeze supply at a time when demand may not fall by much, recession or not.
Indeed, JP Morgan, in a report last week had predicted that oil prices were headed to $100 a barrel because oil demand was bound to rise as customers switch from more expensive gas.
It also warned that US strategic petroleum reserves are the lowest in several years crimping America’s ability to meet the supply shortage by releasing these inventories. The US investment bank also said it sees the US-Iran nuclear deal — which could add a further million barrels a day output — as unlikely to fructify.
All this means that it might not be far ahead when Brent crude prices again test $100 a barrel. For India, this is not good news as rising crude and stronger dollar make imports costlier and raise domestic inflation. However, current estimates of inflation do seem to have factored this rise expected rise in prices. Last week, in its monetary policy statement, the Reserve Bank of India had said it was assuming an average price of $100 a barrel for the Indian crude basket while projecting inflation at 6.5 percent for the current quarter and 5.8 percent for the quarter ending March 2023.Investing insights from our research team
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Ravi KrishnanMoneycontrol Pro