Why are oil prices elevated after OPEC+ verdict and how will it impact India?
The April 3 policy decision by OPEC+ led to a spike in international crude prices to their highest in five months. With the spike in prices, benchmark Brent crude futures is currently trading at $90 per barrel, a level last seen in October 2023.
What did OPEC+ decide at its latest policy meeting?
The JMMC of the OPEC+ cartel, met online on Wednesday, April 3, to review the market and members’ implementation of output cuts. In a statement following the meeting, OPEC+ said some member countries had promised to improve their adherence to supply targets.
The panel welcomed pledges from Iraq and Kazakhstan to achieve full conformity as well as to compensate for overproduction, and Russia’s announcement that its cuts in the second quarter will be based on production not exports, said OPEC+ in its statement. Russian Deputy Prime Minister Alexander Novak also said last week that Russia was in full compliance with its commitments to reduce oil supplies as part of the OPEC+ deal.
Last month, OPEC+ members, led by Saudi Arabia and Russia, agreed to extend voluntary output cuts of 2.2 million barrels per day (bpd) until the end of June to support the market. Saudi Arabia, the de facto leader of the OPEC cartel, said it would extend its voluntary cut of one million bpd till mid-2024, leaving its output at around nine million bpd–well below its capacity of 12 million bpd.
Also Read: Explained | Why did OPEC+ members extend oil output cuts to mid-2024
How did crude oil prices react to OPEC+ policy decision?
After the OPEC+ policy verdict, crude oil prices settled at their highest levels since October with Brent crude futures at over $89 per barrel driven by supply disruptions in the Middle East and tighter outlook for the remainder of the year.
Till February 2024, crude oil prices largely remained range-bound, however Ukraine’s drone attack on Russian oil refineries led to a sudden uptick in prices. In March, crude prices hit a five-month high at $87 per barrel-mark over the persistent geopolitical tensions and is now at $90 per barrel. After the latest OPEC+ policy decision, US West Texas Intermediate (WTI), the US benchmark, breaching $85 per barrel level for the first time since October last year.
How will high crude oil prices impact India?
India which is a net importer of crude oil, fulfills as much as 85 per cent of its energy needs through imports. The country’s inflation, current account deficit, import bill, depreciation of currency, fiscal deficit, among other indicators get affected by a rise in global crude oil prices. Apart from cost pressures, India may see a heavier import bill if crude prices are elevated for a longer period of time.
Oil marketing companies (OMCs) also remain under pressure over rising crude prices. Last month, the government slashed retail prices of petrol and diesel by ₹2 per litre, due to which OMCs recorded a pressure on refining margins. If crude oil prices remain elevated, the government may announce a further reduction on retail fuel and gas prices, leading to a further pressure on OMCs.
Where are prices headed?
Commodity market analysts are concerned that now that the risk of $90 per barrel is surpassed, crude may head back toward $100, which is likely to fuel a new round of inflation in importing countries, as well as hurting anticipated demand growth. Stronger oil prices may also crimp demand, especially in the price-sensitive developing economies in Asia, the world’s top importing region.
On possibilities of Brent touching $100 per barrel-mark in FY25, Mohammed Imran, Research Analyst at ShareKhan by BNP Paribas said, ‘’Unless we see escalation of middle eastern war turning into a full blown-up war involving major producers in the region, we are unlikely to see Brent touching $100.”
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 05 Apr 2024, 07:58 PM IST
