OPEC’s surprise cut may put India’s resolve to fight economic agonies on greasy field
Surprise output cut by oil cartel OPEC+ has jolted global policymakers and the looming impact reverberated across asset classes as it fuelled fears of further inflationary pressures at a time of lingering recession worries and threats to the banking sector. This is increasingly worrying for India, because it buys 85% of its crude oil needs from overseas markets which stretches its trade deficit. It also causes fluctuations in global assets, including pushing US treasury yields higher, impacting investors in the Asian nation. India’s increased purchases of discounted oil from Russia may not be a strong support against the risks for the macroeconomy variables including growth, balance of payments, rupee and of course the plight of consumers. Saudi Arabia and other Organization of the Petroleum Exporting Countries oil producers on Sunday announced another production cut of around 1.16 million barrels per day. This raises the total volume of cuts from the oil cartel with Russia and other allies to 3.66 million bpd, according to Reuters calculations, which is equal to 3.7% of global demand. Russia had last month announced an oil output cut of 500,000 bpd. The surprising move that the United States called ‘inadvisable’ comes at a time when experts already feared a supply shortage in the second half of the year amid further improvement in mobility. The International Energy Agency said last month that demand in the December quarter may rise to 103.5 million bpd, up 2.2 million bpd from current levels and ahead of supply. “The OPEC+ cut in production along with higher demand in H2 — once China recovery gains momentum — could increase pressure on oil prices in the coming months. The oil market might move into a deficit in Q2 compared to the expectation of a surplus earlier,” Sakshi Gupta, Principal Economist at HDFC Bank told ET Online. However, the reduction in demand from major economies like the US and European Union, as recessionary impulses rise in H2, could cap the extent of the oil price increase. The balance of these two opposing forces should keep brent crude between a range of $80-90 pbl on average in FY24, she said. Bloomberg on Monday reported that “the implied deficit in global oil supplies in the second half of the year would be on a par with what we saw during 2021, when crude prices roughly doubled to their current level of around $80 a barrel.” Oil prices soared almost 6% in Asian trade in the morning. The West Texas Intermediate contract was up 5.74% to $80.01 a barrel, while Brent rose about 6% to $84.42. Strategists at ANZ Bank had earlier forecast OPEC to maintain its production cuts announced in late 2022 and the crude oil prices to push above $100 per barrel in the second half of the year. Goldman Sachs tweaked Brent crude’s price forecast following the output cut to $95 per barrel this year-end and $100 in December 2024. A worry for India Coming back to the impact on India and to begin with the obvious one, threats of further oil price spike fans inflation worries, making it complex for the rate-setting panel with policy choices as they were widely expected to go for a rate pause after a 25 bps hike later this week. The Reserve Bank of India had vouched to keep ‘Arjuna’s eye’ on the retail inflation rate, which has mostly refused to come below the central bank’s 6% mandated ceiling since over the last 15-16 months. Retail inflation in India stayed elevated at 6.44% in February, also driven by rising food prices. While Indians are negotiating price rises for their staple food, unseasonal rains in recent weeks and El Nino risks add to miseries of crop damage and further price spike. The inflation pressure on pulses-to-cars for Indians also comes along with pangs of the rising unemployment rate and layoffs going beyond the tech sector, rising income inequality and weakening consumption in an economy that many believe is going through a K-shaped recovery. In May last year, the Narendra Modi-led government cut taxes on retail fuel prices. However, the reduction amount lagged the tax hikes the government had undertaken earlier on several occasions when crude prices fell to a nadir, promising to lower taxes later if prices increased. Government officials recently ruled out possibilities of lowering taxes on pump prices as oil marketing companies have yet to recoup accumulated losses worth over Rs 18,000 crore. Retail petrol prices continue to be above Rs 100 per barrel in many parts of the country, including metropolitans like Kolkata, even as New Delhi and opposition-led state governments fight over who should cut taxes. A raft of taxes and cess further fuel the price of the commodity that affects the prices of what Indians eat, wear or how they commute to earn a livelihood. While passing on higher fuel prices to consumers adds to the plight of citizens, the government absorbing the high prices will widen the fiscal deficit, a key metric that New Delhi is looking to narrow and pitch for a higher sovereign rating. The oil price spike is also a risk for India’s macro variables that have shown signs of improvements recently, including a range-bound rupee (which is otherwise one of the worst performers in emerging Asia), tailwinds for current account deficit and balance of payments and the foreign exchange reserves hitting an eight-month high. India’s current account deficit eased to 2.2% of GDP in the third quarter of the last fiscal year from 3.7% in the previous fiscal. Interestingly, the current account and BoP position had benefited from lower commodity prices, increased share of Russian crude imports and higher services exports. “For India, the current account deficit for FY24 is expected at 1.6% of GDP but if the current oil price rally sustains, we could see a 0.3%-0.5% of GDP increase in the forecast. For inflation we could see an upward revision of 20-30 bps in forecasts for this fiscal,” HDFC Bank’s Gupta said.
Oil buyers reel from OPEC+ cuts as they explore alternatives
Oil refiners in Asia — like the wider crude market — have found themselves caught out by the surprise Saudi-led move to spearhead an OPEC+ production cut, and are now preparing to diversify purchases in the spot market if needed. The shock decision from Riyadh and some of its partners came just before the release of Saudi Arabian Oil Co.’s official selling prices, or OSPs, for May crude sales. Term buyers of Saudi crude expressed some concern about their ability to get the volume and type of oil they want from Aramco next month after the announcement of a 500,000 barrel-a-day curb by the Kingdom. Given the turmoil in the market, some Chinese refiners are starting to mull spot purchases from suppliers including Latin America, the US and West Africa to make up for a shortfall should OSPs from Saudi Aramco and other producers become too expensive, according to people familiar with trading strategies. Oil futures surged as the week opened following the supply cut. The plan was announced in piecemeal fashion at the weekend, with Saudi Arabia unveiling a plan for lower production that was followed by smaller moves by other nations. Riyadh, along with Moscow, are the de facto leaders of OPEC+, as the Organization of Petroleum Exporting Countries and its allies are known. Persian Gulf nations such as Saudi Arabia and Iraq sell the bulk of their oil to Asia, with China, India, Japan and South Korea as the biggest buyers. Aramco typically releases OSPs in the first five days of the month, and they are used as a benchmark by others. In a Bloomberg survey last week, six refiners and traders predicted a cut for Aramco’s OSP for its flagship Arab Light grade. The surprise move boosted Brent futures by more than 8% as the week’s trading began. It comes at a complicated juncture in the market, with concerns about weaker consumption in the US and Europe gathering pace should a recession coincide with a wave of demand-sapping refinery strikes in France and, on the upside, expectations that consumption in China will pick up. Ahead of the shock, China’s state-owned PetroChina Co. has already been tapping supplies from Canada, Colombia and Ecuador, buying at least 8 million barrels that will load this month as a new mega-refinery starts production officially in Guangdong, Bloomberg News reported last week. In India, another major consumer of Middle Eastern crude, Mukesh Surana, chief executive officer of Ratnagiri Refinery and Petrochemicals Ltd., which is building a refinery, said that OPEC+ may have decided on a supply reduction as it foresaw a weaker market. “The market is well-supplied, so there is no concern on availability,” said Surana, who’s also ex-chairman of Hindustan Petroleum Corp. “OPEC+ must be expecting a fall in prices or dip in demand, so this is probably a preemptive move to provide floor to prices. But I don’t see prices rising above $90.”
Goldman Sachs Raises Oil Price Forecast Following OPEC+ Cut
Hours after OPEC+ announced it would reduce its combined oil production by more than 1 million bpd, Goldman Sachs issued a revision of its oil price forecast, raising it to $95 from $90 at the end of the year for Brent crude. The bank also raised its Brent crude forecast for 2024, now seeing it at $100 at the end of the year from an earlier projection of $97. Last month, Goldman Sachs said that crude oil prices could rise to $107 per barrel if OPEC stood by its production targets. At the time, Brent was trading at around $84 per barrel. In that same March forecast, Goldman’s analysts predicted that rising demand from China and a slow increase in non-OPEC production could prompt the cartel to reconsider its targets and start boosting output from June onwards. Even under that scenario, however, Goldman’s analysts noted that oil prices would rise in the second half of the year. And that scenario saw 1 million bpd added to global supply. Then, at the end of March and with oil prices still quite subdued, Goldman reiterated its bullish outlook, advising traders to buy the dip while it lasted. “We would argue you are buying the dip at this point,” the banl’s head of commodities Jeffrey Currie said, adding, “I have never seen a market sell off that sharply, but retain a bullish structure.” “Today’s surprise (production) cut is consistent with the new OPEC+ doctrine to act preemptively because they can without significant losses in market share,” the investment bank said, as quoted by Reuters. OPEC+ announced an unexpected update to its production cuts, to the tune of 1.16 million bpd, with Saudi Arabia accounting for the lion’s share, at 500,000 bpd. According to unnamed sources who spoke to the Financial Times, Riyadh had been annoyed by the Biden administration’s decision to delay the start of oil purchases for the SPR.
Pakistan to get crude oil from Russia at same discounted price as India
In a significant move, Pakistan has managed to get the same discount on the import of Russian oil like other nations, including India. This was stated by Pakistan Minister of State for Petroleum Musadik Malik at a Geo News program. According to reports, the minister said that Islamabad will be given same discount like its neighboring countries on the import of Russian crude. However, Malik did not share any details regarding the agreement between the two nations
Govt extends export restrictions on petrol, diesel to ensure availability
In order to secure the availability of refined fuels for the domestic market, the government has increased restrictions on the export of diesel and petrol. This comes after the government’s export restrictions on diesel and petrol ended on Friday. India is the world’s third-largest oil consumer. The government placed a windfall tax on refined petroleum exports last year. It also required companies to sell 50 per cent of their petrol exports and 30 per cent of their diesel exports domestically until the end of FY23. The windfall tax on diesel exports was reduced to Rs 0.50 per litre and nil on jet fuel (ATF) as of March 4, this year, while the duty on domestically produced crude oil was hiked considerably. The extension may come as a shocker for refiners, particularly private firms, from purchasing Russian fuel for re-export to countries such as Europe, which have suspended purchases of refined products from Russia as a result of its invasion of Ukraine. Last year the government imposed the rare restrictions after non-state refiners Reliance Industries and Nayara Energy, key Indian buyers of discounted Russian supplies, began reaping substantial profits by aggressively boosting fuel exports instead of increasing domestic sales. As a result, state refiners were forced to fill the hole and meet domestic demand by selling petroleum at lower, government-capped rates.
Adani’s Dhamra LNG terminal in Odisha receives 1st cargo, to start gas revolution in East
Adani Group and French company TotalEnergies’ newly built Rs 60 billion LNG import facility at Dhamra on the Odisha coast has received its first ever shipment of liquefied natural gas – a fuel that will be used to make steel, produce fertilizers and turned into CNG and cooking gas, helping change the landscape of Eastern India. Qatari ship ‘Milaha Ras Laffan’ docked at Dhamra Port on April 1 morning, bringing in 2.6 trillion British thermal units of natural gas in its frozen form (LNG) which will be used to commission the facility, officials said. Commissioning and testing operations will take up to 45 days and commercial operations are expected to start thereafter. The start of the 5 million tonne per annum LNG import terminal is crucial to Prime Minister Narendra Modi’s plan to boost natural gas use in the country’s energy mix to 15 per cent by 2030 from current 6.3 per cent.
Oil Prices Soar As OPEC+ Shocks The Market
OPEC+ on Sunday surprised oil markets with an announcement that it will reduce its output further, by some 1.16 million barrels daily. Reuters noted in a report that with the new cut, the total output reduction amount from OPEC+ will come in at 3.66 million barrels daily, or 3.7% of global oil demand. The Financial Times reported that oil prices had gained 8% immediately after the announcement, noting Saudi Arabia’s share of the cuts would be almost half of the total, at 500,000 bpd. Russia, meanwhile, said it would extend the production cuts of 500,000 bpd it announced earlier this year until the end of 2023. The FT noted the unusual nature of the announcement as it was made outside the group’s regular monthly meetings, the next of which is taking place today. The U.S. administration expectedly criticized the move, saying it was not the time to cut production. “We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear,” a spokesperson for the National Security Council said, as quoted by The Hill. “But we’re focused on prices for American consumers, not barrels, and prices have come down significantly since last year, more than $1.50 per gallon from their peak last summer,” the spokesperson, who was not named in the Hill report, added. The move by OPEC+ to curb production further came after the sharp drop in oil prices last month, largely driven by concern about the banking industry after a couple of sizeable bank collapses in the United States. The events sparked concern about the stability of the Western banking system, reinforced by the near-death experience of Credit Suisse, and fear of a recession that would affect oil demand. “OPEC is taking pre-emptive steps in case of any possible demand reduction,” Energy Aspects’ Amrita Sen told Reuters.