Will Opec meet end the long rally in global oil prices?
Reports that Opec members and Russia shall review their production cuts are making the crude oil markets jittery
The big event to watch this week, apart from the football World Cup, is the Opec (Organization of the Petroleum Exporting Countries) meeting in Vienna on Friday.
Reports that Opec members and Russia shall review their production cuts are making the crude oil markets jittery. Brent crude prices dropped to $73.44 a barrel last Friday, the lowest since 2 May.
Also affecting crude oil prices are the retaliatory tariffs China has imposed on US crude oil, part of the escalating trade war between them. Suresh Sivanandam, senior manager Asia refining at consultancy Wood Mackenzie, said US crude oil exports to China have been in the range of 300,000 barrels per day in the March 2018 quarter, accounting for more than 20% of total crude oil exports.
To be sure, China’s tariffs on US crude oil do not mean that global oil demand will be affected, said Ritesh Jain, chief investment officer at BNP Paribas Asset Management India Pvt. Ltd. “But to that extent, the development coming ahead of the Opec meeting adds to the nervousness in the oil markets,” he said.
According to Jain, for the oil markets, the Opec meeting is crucial, as its planned 1.8 million barrels per day (mb/d) output cut went a long way in boosting crude oil prices. It isn’t yet a done deal, as Iran is opposed to increasing production and Brent futures recovered after reports of a much smaller compromise output hike.
In practice, the production cuts have far exceeded that, with cuts totalling nearly 2.5 mb/d in April 2018, pointed out BP Statistical Review of World Energy last week. The excess is mostly driven by the collapse in crude oil production in Venezuela.
Increased production of US shale oil took some sheen away from the anticipated impact of the output cuts. Nevertheless, “the speed and scale of Opec’s actions mean that it continues to have the ability to smooth temporary disturbances to the oil market”, pointed out BP’s review.
Lower crude oil prices are of course helpful for India. It helps keep inflation under check and reduces the import bill. A fall in oil prices would soothe concerns about the burgeoning current account deficit and take the pressure off the rupee.
In the equity markets, shares of state-run oil marketing companies (OMCs) went up 2.7-5% on Monday, a day when the benchmark Sensex declined a bit. OMCs include Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd.
Nitin Tiwari, an analyst at Antique Stock Broking Ltd, said a correction in global crude oil/product prices has given OMCs an opportunity to restore and normalize retail marketing margins. A softer refining margin environment has also helped this time around, as it keeps product prices lower.
“As a result, despite frequent downward reduction in domestic retail prices, the marketing margins have gradually improved to about Rs1 per litre (for petrol) and about Rs1.65 per litre (for diesel) after hitting a low of about Rs0.3 a litre (petrol) and about Rs0.7 per litre (diesel),” added Tiwari.
Aviation stocks too cheered the fall in crude oil prices.
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