World oil markets were roiled last week by the decision of the oil cartel, the Organisation of Petroleum Exporting Countries (OPEC) along with Russia and its allies to cut output further. The reduction of 1.16 million barrels per day brings the total cuts in output for member countries to 3.66 million barrels per day. Prices rose immediately from about $73 per barrel to $86 per barrel for the benchmark Brent crude. The situation stabilised slightly in the following days and crude is now ruling at around $85.
The sudden move by OPEC plus to flex its muscles came just as the world was heaving a sigh of relief that oil prices had moderated to affordable levels. Major importers like India and Japan might have had a chance to reduce domestic retail prices in case the softened rates had continued for a few months. This was not to be, however, as the Saudi Arabia-led cartel was determined to bring prices back to a level that would garner much higher revenues.
Taking a long-term view
The reasons for the latest move to prop up world prices are not far to seek. The immediate provocation is fears of a banking crisis that could have a contagion effect on international banking systems and in turn, depress oil markets. It seems however a more long-term view is being taken by major exporters like Saudi Arabia, the United Arab Emirates (UAE) and Kuwait. They are recognising that the world is slowly but inexorably shifting to renewable energy sources. The effort is therefore to build up sufficient industrial infrastructure to face such a future.
While there are differing views on the phase out of petroleum and natural gas, one study by the International Institute of Sustainable Development predicts that after 2030 electric vehicles will eat into the 44 per cent of global crude oil output dedicated to transportation. This will be compounded by falling demand for oil use in other sectors, it says. It is against this backdrop that one must view the insistence of cartel members seeking to bring about a hardening of oil prices. As of now, many of these countries especially in West Asia have few other revenue sources barring hydrocarbon resources.
Price trends unpredictable
Whether prices will remain at these elevated levels for the rest of the year, however, is difficult to predict given the unexpected geopolitical developments in recent times. International oil markets had responded with extreme volatility when the Ukraine conflict began in February 2022. Crude oil had shot up from $70-80 per barrel to a peak of $139 within a few days. These moderated after a while to an average of about $100 per barrel for the next few months.
It was in September that prices began to soften due to demand falling in China after the stringent zero COVID policy. These reached a low of $84 per barrel and then ruled at around $80-90 till March this year when another unforeseen event sparked volatility in global oil markets. The collapse of the Silicon Valley Bank and the takeover of flagship Swiss bank Credit Suisse created fears of contagion to the global banking system. That resulted in prices crashing rapidly within ten days from $86 to $73 per barrel.
India’s oil bill
The OPEC gambit has reversed this trend and brought oil prices back into firmer territory. This is undoubtedly bad news for India which imports 85 per cent of its requirements. Even the discounts on Russian crude oil will not be able to overcome the higher costs of total oil imports during 2023-24. The crude oil import bill for fiscal 2023 is expected to touch $200 billion, about 60 percent higher than $122 billion in fiscal 2022.
As for the future outlook, many forecasts have been made and hurriedly revised. Goldman Sachs, for instance, had projected that prices would reach $100 by the end of 2023, but has now revised it to $95. The fact is, much depends on the geopolitical scenario. An end to the Ukraine war could certainly bring a softening trend to world markets. Similarly, the incipient threat of recession deepening in the US or Europe could have an equally depressing effect on prices.
Yet if one is to make an educated guess, it would be that prices would continue to hover around the $80-90 per barrel market for most of the year. Any greater firming up in the market is likely to be stymied by a fall in demand from economies facing a slowdown owing to aggressive monetary tightening policies. Oil markets are thus likely to remain volatile during the year but may not harden unduly which can be a comfort for emerging economies like India.
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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