How will OPEC production cuts affect India?

The Reserve Bank of India had retained its FY23 inflation projection at 6.7 per cent — with Q2 at 7.1 per cent, Q3 at 6.5 per cent, and Q4 at 5.8 per cent — based on its assumption that the Indian crude basket’s price would be lower than before at 100 dollars per barrel in the second half of FY23.

And the retail inflation was projected to further reduce to five per cent in the first quarter of FY24. The RBI also revised its FY23 growth forecast only marginally to 7 per cent from 7.2 per cent. All this was based on the belief that the crude will stay below $100 a barrel.

But, the Organisation of Petroleum Exporting Countries (OPEC) and its allies — collectively known as OPEC+ — pulled a shocker this Wednesday. They have decided on cutting oil production by 2 million barrels per day (bpd), a move which will again push crude oil prices closer or beyond $100 per barrel.

Some analysts believe that Brent is likely to top the 100-dollar per barrel mark — up nearly 7.5 per cent from the present levels. And despite pressure from the US to pump more crude to help the global economy, the new production cap levels will come into force from November this year and remain in place until December 2023.

From their recent low of 82 dollars a barrel around the 26th of September, Brent oil prices have climbed over 13 per cent to more than 93 dollars a barrel at present. According to a UBS report, the price of Brent could shoot up to 110 dollars per barrel by the end of December 2022 and hold at 125 dollars per barrel in 2023, all the way till the end of September.

What it means for India

If these projections hold true, the consequences would be dire for India due to higher inflation, lower consumption, and a worsening of the external sector situation. Ultimately, the country’s growth rate would be compromised. However, not everyone agrees that the price of oil will shoot up to such an extent.

We spoke to Paul Hickin, a commodities expert, to understand what kind of floor has been set by the the OPEC+ move for oil prices for the next few quarters.

From its high of 116.01 dollars per barrel in June, the price of the Indian basket of crude oil fell to its lowest level in FY23 at 90.29 dollars per barrel in October. An impact on these prices is possible since the Indian basket of crude oil represents a derived basket comprising of the Sour grade, which is the Oman and Dubai average, and the Sweet grade, which is Brent Dated, of crude oil processed in Indian refineries in the ratio of 75.62 is to 24.38.

Impact on external sector

India imports over 86 per cent of its oil requirement. A rise in prices will mean that India’s import bill will also increase. As a result, the Current Account Deficit, or CAD, will widen. A number of analysts estimate that on an average, a 5 dollar increase in crude prices can translate into the CAD widening by over 6.5 billion dollars. The impact of higher oil prices on the import bill would also be felt in the country’s foreign exchange reserves and exchange rate.

India’s April-June CAD came in at 23.9 billion dollars, or 2.8 per cent of GDP. This represented a 15-quarter high. There were apprehensions in some quarters that the CAD could widen all the way to 5.5 per cent of GDP in the second quarter, which would be the second worst quarterly deficit on record. One agency had estimated that CAD could widen to a decade high of 3.8 per cent of GDP in FY23. In FY22, the CAD was 1.2 per cent of GDP.

So, what will be the impact of the OPEC+ move on India’s increasingly vulnerable external sector?

The retail inflation rate reversed its three-month downward trend in August, rising to 7 per cent from 6.7 per cent in the previous month. With increasing crude prices leading to higher inflation, could concerns emerge on the growth front, too?

The overall situation remains dynamic. In September, Russia bounced back to become India’s second-largest crude supplier. In just six months, Russian oil has become the mainstay of refiners in India. However, pressure from the US continues on this front due to the war in Ukraine. The Wall Street Journal recently reported that the US could conditionally ease sanctions on Venezuela, allowing Chevron Corp to pump oil in the country. Meanwhile, the US has accused OPEC+ of aligning with Russia after the group agreed to the deep production cuts. The US has also said that it will continue to release oil from its strategic stockpiles.

The anti-cartel legislation known as NOPEC, which had been considered by the US in the past, was also brought up when reports said that President Joe Biden would work with the US Congress on legislation to curb OPEC’s control over energy prices. For their part, the Indian government and the RBI will, at the very least, have one more major challenge to contend with on the external sector front.

supply hyperlink

What do you think?

Written by admin

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

“Difficult For Selectors…”: VVS Laxman’s Big Statement Ahead Of 2023 50-Over World Cup

India Vs South Africa: Ruturaj Gaikwad’s Snarling 42-Ball 19 On ODI Debut Triggers Memes And Jokes On Twitter