The price of oil - Impact

The price of oil - Impact
The price of oil rose to its highest since mid-2015. Brent crude futures LCOc1 were up 59 cents at $61.53 per barrel having hit a session peak of $61.70 earlier. This is the..

The price of oil rose to its highest since mid-2015. Brent crude futures LCOc1 were up 59 cents at $61.53 per barrel having hit a session peak of $61.70 earlier. This is the highest prices have been since July 2015.

OPEC nations as well as Russia have improved compliance with pledged supply cuts in order to address oil glut.

Background

Organization of the Petroleum Exporting Countries (OPEC) is group comprised of 14 oil producing nations. It was founded in 1960. The current members of OPEC are - Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Indonesia used to be a member but it suspended its OPEC membership in December 2016.

From 2010 until mid-2014, world oil prices were around $110 a barrel. However, price of oil has fallen significantly in the recent years. It is now around $50. To address the sluggish prices, OPEC nations came to an agreement in November 2016 to cap their output until the oil glut was reduced.  In May 2017, they agreed to extend that deal by nine months. This isn’t the first time oil prices have been severely hit due to a glut. Prices of oil fell in the 80s due to falling demand. It resulted in a six-year decline in the price of oil.

In July 2017, the OPEC nations met once more to discuss plans on whether they should further cap oil output by 1.8 million bpd beyond March 2018. The meeting was held in Russia and was attended by non OPEC oil producing countries as well. During this meeting, Saudi Arabia, announced that it will limit its oil exports to 6.6 million bpd (barrels per day). This is a million bpd lesser than the previous year. 

Analysis

The price of oil rose to its highest since mid-2015. Brent crude futures LCOc1 were up 59 cents at $61.53 per barrel having hit a session peak of $61.70 earlier. This is the highest prices have been since July 2015. OPEC nations as well as Russia have improved compliance with pledged supply cuts in order to address oil glut.

“The bulls have it and momentum is strong,” Saxo Bank senior manager Ole Hansen said. “We know how oil can easily run ahead of what is fundamentally justified and we’ve seen that in both directions in the last couple of years,” he said. “We really need to see demand growth pick up even more strongly than what is currently expected for the bullish outlook for to be maintained.”

OPEC’s October output fell by 80,000 bpd to 32.78 million bpd.  OPEC is now adhering to the pledged cuts by 92%. In September 2017, it was 86% in compliance with the deal. Saudi Arabia has taken the leadership in these efforts and has announced that it had further cut crude oil allocations for November by 560,000 barrels per day. Analysts also expect Russia to hold its end of the deal.

As oil prices have begun to rise, CEOs of big oil companies have begun urging OPEC regions as well as Russia to extend the output cuts beyond March 2018. They argue that there is “huge volatility” in the energy market and these nations have to work to stabilize it.

 “It is better to keep a stable policy and I think the OPEC and non-OPEC agreement is working efficiently and should continue,” Patrick Pouyanne, the chief executive of Total.

BP CEO Bob Dudley also agreed with the above statement noting, “I heard what Patrick (Pouyanne) said about the volatility of oil and the factors here and I couldn't agree with him more … I think this is the world we are living in. Short term exuberance does not characterize I think any of the CEOs that I know in oil and gas right now."

Meanwhile, India’s oil imports for the month of September has hit an all time high. According to data that has been published, India imported 4.83 million barrels per day (bpd) of oil in September. India currently imports 80% of its oil needs. For a detailed overview of the India’s oil exports, click here.

Assessment

Our assessment is that as we have stated earlier, rise in oil prices will significantly affect the Indian economy. India, which depends on imports to meet 80% of its oil needs, will have to spend approximately Rs 9200 crores more every year for a one dollar per barrel increase in crude prices. We had predicted that the target of 3.2% fiscal deficit would be difficult to achieve if prices of crude oil goes northwards of US$ 60. It now seems likely that OPEC nations will continue to regulate the market and oil prices are expected to rise. 

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