Shishir Asthana Moneycontrol News
Indian financial markets - equities, currencies and bonds - have reacted adversely to rising crude oil prices globally. Benchmark Brent and WTI (West Texas Intermediate) are still below their four-year highs, but thanks to a falling dollar-rupee, the Indian oil basket has already crossed this unwelcome threshold and sits at levels last seen in October 2014.
The impact could have been more severe had it not been for a technology upgradation at Indian refiners that has given them the ability to process cheaper sour crude. The ratio of sour crude to sweet oil has changed from 57 percent in 2000-01 to the current 72.38 percent. But this saving hasn’t been enough to prevent the price of imports from soaring as the rupee has depreciated considerably against the dollar.
The high import bill will pressure the rupee further and spur inflation, potentially setting off more interest rate increases and choking growth.
For India, it is important to look at the price of oil on the basis of what it is actually paying and the type of oil it is importing rather than looking at benchmark oil in dollars.
This is where Iran comes in. India is the second largest buyer of crude oil from Iran, but this supply is threatened by US sanctions on Iran. While the supply from Iran can be easily replaced, what makes Iran an important supplier is that it supplies oil in rupee terms rather than in dollars.
It is not that India is the only country that will need to defy US sanctions. China has already done so and the European Union has taken steps in this regard, including barring European Union citizens and businesses from obeying them. In fact, loyal US ally the United Kingdom is taking advice from Japan on ways to avoid sanctions. In the past, Japan was able to continue signing oil deals with Iran despite US measures.
While continued supply from Iran in rupee terms would be ideal, if oil prices continue to rise, the relief will be only partial.
The oil market is precariously poised between supply and demand. The expectation of a tropical storm in the Gulf of Mexico, which accounts for 17 percent of US oil production, resulted in a jump in oil prices. A shutdown of a few days having such an effect on prices illustrates how tight the market is.
The only consolation is that India is not the only country that will be affected by a strong dollar and rising oil prices. Falling demand for oil is the only way prices can be brought under control, but that silver lining would have a large cloud inside it: falling demand would suggest slowing economies across the world.
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