Indian Economy & Policy
cooking on the crude oil front and how could it affect you?
Since early October, crude oil prices have
plummeted by almost 30% as the prospect of a glut in the world markets loomed
A combination of factors - such as the
possibility of global trade wars, a slowdown ininternational growth and lower
demand from the Middle East and China – all fuelled these fears. But above all
these, the biggest concern was the Trump administration’s equation with Iran. At first, the prospect of US sanctions
against Iran triggered a sharp rise in
prices. Then, the exemptions from the sanctions granted to a number of the
Middle Eastern state`s biggest buyers sent the price of Brent crude tumbling.
Now the most recent pick up, in the first
week of December 2018, seems to have been driven by the outcome of the G20
talks. At the summit, the US and China agreed to not escalate the tariff war
and take immediate efforts to address issues of mutual
concern based on mutual respect, equality and mutual benefit. Oil traders reacted
bullishly to this political ceasefire between the United
States and China. The price of Brent rose to 4.3% in early trades assuming that
China would revoke its decision to cut out imports of US energy
commodities such as crude oil, coal and liquefied natural gas (LNG) from the US.
But all that is still tentative and the
upcoming Opec meet in Vienna will give further direction to oil price
movements.Accordingly, the 15-member meet, which includes Saudi Arabia and
Kuwait, and allies from outside the group, including Russia, is perhaps the
most keenly awaited since 2016.
On the face of it, the meet is expected to
deliver a consensus on lower global output towards stemming a further drop in
prices. However, it seems unlikely that the amount of cutbacks will be decided
on, much less inked, as Opec-principal, Saudi Arabia, still faces pressure from
the US President Donald Trump, to keep output high and prices down. Being a key
political ally,Saudi Arabia may be forced to oblige. There is, however, sure to
be some reduction in production agreed upon. But it’s unlikely this amount will
be adequate to drive prices up substantially.
On the flip side, if traders get a sense
that the agreement to restrict supply is just cosmetic, they are likely to
begin selling hard and fast, driving prices down further. Either way, a
substantial price rise is unlikely while the downside possibility is wide open.
does this mean for India?
Lower crude prices immediately translate
into a smaller trade deficit as it shrinks our import bill. It also quickly
translates into more benign inflation and even a stronger rupee, perhaps. All
in all, it looks like happy days are here again.