Oil Prices On Track For First Quarterly Loss Since 2020
Fears of a global recession have caused crude oil prices to fall for most of the quarter that ends today and they are likely to book their first quarterly decline since 2020, according to Bloomberg. “Oil’s poor quarter is clearly a reflection of an oil market that is losing its tightness as global recession risks surge,” Ed Moya, senior market analyst at Oanda, told Bloomberg. “Energy traders clearly expect drastic action by OPEC+.” “Amid so much uncertainty, seesaw trade may be common over the next week, unless we get more clarity from OPEC+ sources on the likely size of any adjustment and what it means for previous missed quotas,” another senior oil analyst from Oanda told Reuters. For the fourth quarter, it seems there’s some upside potential for prices, coming from OPEC. First, reports earlier this week suggested Russia would propose a production cut of 1 million bpd. Then later reports said several large producers in the OPEC+ group had started discussing cuts. While a production cut from OPEC+ would serve to counter economic pessimism, the effect might not be sustained because OPEC+ is already producing much below its own target: the figure for August was lower than targets by more than 3 million bpd. In other words, whatever the official production targets are, actual production tends to be much lower, effectively making targets meaningless. The tightness of global oil supply that OPEC officials have been warning about, however, remains very real and about to get potentially more severe after the EU embargo on maritime Russian oil imports enters into effect in December. Physical demand destruction appears to be the only way to temper prices and a soaring U.S. dollar has done a lot to achieve that, albeit probably inadvertently. Earlier this month, oil prices slumped to the lowest in eight months as the greenback jumped to a two-decade high fuelling stronger recession fears.
How high crude oil prices are ‘breaking India’s back’
Foreign minister S Jaishankar was not wrong when he said on Tuesday high oil prices are breaking India’s back. Despite cheap crude import from Russia, India’s crude oil basket has averaged above $100 a barrel so far this year. As per the Petroleum Planning and Analysis Cell, a body of the Petroleum ministry, India’s crude basket more than doubled in the past 3 years, taking crude prices from an average $45 per barrel in 2020-21 to $104 per barrel in 2022-23 (till September). India’s crude basket price averaged at $102.97 a barrel in April 2022, $109.51 in May, $116.01 in June, $105.49 in July, $97.40 in August and $91.23 per barrel in September so far. “The price of oil is breaking our back. We are a $2,000 per capita economy. The energy market is under stress due to the Ukraine war and that not just the pricing but the very availability of oil has become an issue,” said Jaishankar. India is dependent on imports to meet 85% of its oil demand and 55% of its natural gas requirements. It imports majority of crude from the OPEC+ country. The country spent $122 billion on crude oil imports in 2021-22, nearly double that of $62.71 billion in 2020-21. In the first five months of the current financial year, India has already imported $64 billion of crude oil. Dr DK Srivastava, chief policy advisor, EY India, says an ‘Oil Price Stabilization Fund’ may be established to minimise India’s multidimensional vulnerability to global crude oil shocks. He advises the government to expand and diversify sources of oil and gas imports in order to cut the average price of the Indian crude basket. Ever since war broke out between Russia and Ukraine, western countries are beckoning India to stop purchasing crude oil from Russia. India’s oil imports from Russia have jumped over 50 times since April and now it makes up for 10% of all crude bought from overseas. Till last year, Iraq (25%), Saudi Arabia (18%) and the UAE (10%) were the top 3 crude suppliers for India. This year till July, Russia with 14% share has become the third biggest supplier to India.
Why the outlook on petrol prices is not as bad as it seems, now the fuel excise cut has ended
In early March Russia’s invasion of Ukraine pushed global oil prices up by about 30% and Australians faced paying more than $2.15 a litre for petrol. Contrary to economists’ advice, the Morrison government decided to halve of the fuel excise for six months, reducing the cost of petrol by 22.1 cents a litre. That discount period ended at midnight. So what can you expect local fuel prices to do now? To begin with, the fuel excise is indexed so it will add 23 cents to a litre of petrol. But not immediately. Your local service station’s tanks are likely to still hold fuel for which the retailer paid the discounted excise. Federal Treasurer Jim Chalmers has cited industry estimates of about 700 million litres of discounted fuel still being “in the system”. To put that in perspective, Australians consumed an average of about 42.5 million litres of petrol a day in 2021. So it may be one to two weeks, depending on where you live, before you’re paying extra. . But what you will then be paying probably won’t be that different to before Russia invaded Ukraine, with global oil prices dropping due to efforts to increase supply and a deteriorating global economic outlook suppressing demand. Global prices dictate local prices Australia imports about 90% of its refined fuel needs, so the main determinants of the price of petrol and diesel in Australia are international oil prices and the value of Australian dollar to the US dollar (because oil prices are determined in US currency). Over the past six months the Australian dollar’s buying power has declined from about 75 to 65 US cents (a 13% drop). But that has been offset by oil prices falling more than 30% since June. There is no single oil price because oil is traded in different markets according to its quality (with names reflecting the historical source of that type of oil). The following graph shows two commonly cited benchmarks — West Texas Intermediate (from Texas) and Brent Crude (from the North Sea). Prices spiked after the invasion of Ukraine due to Russia’s signicance as an oil exporter (the second-biggest after Saudi Arabia, accounting for about 8% of exports in 2021) and uncertainty about what the conflict would mean for those exports, as well as Russia’s gas exports to Europe and markets generally. Increased supply, faltering demand The steady decline since June is due to two main reasons. First, the efforts of the European Union and the United States to increase non-Russian oil supplies. This has been both to ease inflationary pressures on their own economies as well as to drive down the windfall revenue Russia has made from its oil exports (mostly to China and India). The G7 is working on a plan to further choke off those revenues through imposing a price cap on Russian oil exports. Whether this will succeed depends first on finding agreement in Europe, which is divided over the plan. The Australian government is supporting the price cap but this is mostly symbolic. At this point I can’t see it having much practical impact on Australian petrol prices. Second, the global economy is weakening, which is taking the pressure off demand. The OECD’s economic outlook published this month predicts global economic growth will slow to 2.2% in 2023. As a consequence, the International Energy Agency’s Oil Market Report last month revised upwards its outlook for world oil supply (though it also warned “another price rally cannot be excluded” given disruption risks). Crude oil prices are now below US$90 a barrel — less than at the start of Russia’s invasion of Ukraine. For the next 12 months oil prices can be expected to decline to below US$80. This will put Australian petrol and diesel prices back to where they were in 2021. Which is good news for motorists, if not the global economy.
Govt likely to revise windfall tax on domestic oil refiners soon
The central government is likely to revise windfall gain tax on domestic oil refiners soon, CNBC-TV18 reported on September 29 citing sources. The development comes days after government reduced windfall tax on locally produced crude oil to Rs 10,500 from Rs 13,000/tonne after its fifth fortnightly review, according to a circular issued by Ministry of Finance on September 16. Additionally, it has also reduced tax export of diesel and ATF. The sources added that there can be further cut in cess on crude oil, export duties on diesel and ATF. The Petroleum Ministry has submitted the data of price movement of global crude oil prices over the past fortnight to revenue department pitching for a cut, the sources said. India had first imposed windfall taxes on July 1, joining a growing number of nations that taxes super normal profits of energy companies. But international oil prices have cooled since then, eroding profit margins at both oil producers and refiners. On July 1, export duties of Rs 6 per litre ($12 per barrel) were levied on petrol and ATF and a Rs 13 a litre tax on export of diesel ($26 a barrel). The Rs 23,250 per tonne windfall tax on domestic crude production ($40 per barrel) was also levied. The duties were partially adjusted in the previous four rounds on July 20, August 2, August 19, September 1 and September 16, and were removed for petrol.
India reaches out to US, Iraq for LNG after Gazprom reduces supply
The decision comes as LNG supplies from Russia’s Gazprom have been declining since the start of the Russia-Ukraine war. India has reportedly reached out to Iraq, Saudi Arabia, UAE, and the US to secure liquified natural gas (LNG) at affordable prices. The decision comes as LNG supplies from Russia’s Gazprom have been declining, according to a report in Mint. In 2018, Gazprom Marketing and Trading Singapore (GMTS), a subsidiary of Gazprom, signed a pact with the Gas Authority of India Ltd (GAIL) to supply 2.5 million tonnes of LNG for 20 years. But since the start of the war in Ukraine, the supplies from GMTS have been dwindling. India’s consumption of LNG has been rising on the back of Centre’s decision to diversify its energy sourcing. Currently, gas comprises 6.2 per cent of India’s energy needs. The government is planning to take it up to 15 per cent by 2030, Mint added. India is also largely dependent on imports for meeting its oil and gas needs. Eighty-five per cent of the local oil demand and 55 per cent of the local gas demand is met by imports in India. A government spokesperson was quoted by Mint as saying that the centre is trying to acquire gas from wherever possible at “best-suited prices”. “As of now, availability of gas is not an issue, only the price is. Today, gas is available everywhere, including in the UAE and US. We are trying to negotiate to get a good deal wherein we can get gas at an affordable price. We are looking at Saudi Arabia, the US, UAE and Iraq,” another official said. The report further added that India may not pursue arbitration against Gazprom but may deal with the issue bilaterally “at the highest level of the Indian government”.