NEW DELHI: Oil prices have been on the boil since the war between the US, Israel and Iran broke out on 28 February. To ease supply concerns and prices of over $100 per barrel, the Organization of Petroleum Exporting Countries (OPEC) and its allies including Russia, together known as OPEC+, agreed to increase production in May. Mint looks at how the proposed rise in output might impact global prices.
What is the global crude oil supply scenario?
With the blockade of the Strait of Hormuz, about 20% of global energy supplies from Gulf countries has been almost fully cut off for over a month. Supplies from Russia and Iran are flowing due to temporary waivers on sanctions imposed by the US. Global demand for oil from the two countries and alternative sources in Africa and South America has surged. In a report on 12 March, the International Energy Agency (IEA) said that with supplies declining from around 20 million barrels before the war to a trickle currently, and storage filling up, Gulf countries have cut total oil production by at least 10 million bpd. It projected that global oil supply is projected to plunge by 8 million bpd in March.
What has OPEC+ agreed to do?
The OPEC+ countries—Saudi Arabia, Russia, Iraq, the UAE, Kuwait, Kazakhstan, Algeria and Oman—decided on Sunday to increase production by 206,000 barrels a day in May to support oil market stability.
The Joint Ministerial Monitoring Committee of OPEC+, at its meeting on Sunday, highlighted the importance of safeguarding international maritime routes to ensure the uninterrupted flow of energy. It expressed concern over attacks on energy infrastructure, noting that restoring damaged assets is costly and takes time, affecting overall supply availability.
What other steps have been taken globally to ease supply and price concerns?
In March, the IEA agreed to make 400 million barrels of oil from its emergency reserves available to the market. This is the largest ever release from IEA reserves and the sixth time emergency collective action has been taken to support the oil markets. Previous collective actions were taken in 1991, 2005, 2011 and twice in 2022.
Will these decisions calm market sentiment and prices?
The decision is unlikely to have a major impact on prices. The June Brent contract on the Intercontinental Exchange traded at $108.60 a barrel on Monday, 0.34% higher than its previous close.
Experts said with a prolonged war and blockade of the Strait of Hormuz, the production increase may not ease prices. The OPEC+ quota increase represents less than 2% of the supply disrupted by the Hormuz closure, Reuters reported, citing OPEC+ sources.
Further, supplies from alternative sources may not be able to make up for the 20% cut from West Asia. The rush among major consuming nations to procure oil from alternative sources has led Russia and Iran to sell at a premium or a lower discount. Reuters recently reported that Ukrainian attacks have impacted about 40% of Russian oil export capacity, which may eventually further tighten global supplies.
What has been the impact of high oil prices on India so far?
Supplies of crude oil, petrol and diesel have so far been comfortable, although state-run oil marketing companies have increased prices of premium petrol and diesel and industrial diesel. Private companies Nayara Energy and Shell have also increased petrol and diesel prices.
The government has said the country has secured supplies for two months of crude oil requirements. To avert a price rise in transport fuels, the Centre slashed excise duty on petrol and diesel by ₹10 a litre, resulting in a gross fortnightly loss of about ₹7,000 crore to the exchequer.