Explained | What does Saudi’s July oil output cut mean for India?
- The output by the world’s top oil exporter will decline to 9 million barrels per day from about 10 million barrels in May, as per its fresh production cuts set to kick in from July.
Saudi Arabia will undertake voluntary crude oil output cuts which are set to kick in this month amid a tighter market currently reeling under the impact of interest rate hikes by global central banks due to inflationary pressures. Crude oil prices have been on a downtrend this year as a result of sluggish global economic growth and declining energy demand.
However, as a result of tighter supply on Saudi cuts, oil prices are likely to witness an uptick in the coming months. High global oil prices could impact India - a country largely dependent on imports to fulfill its energy needs.
What did oil producers decide?
In the previous meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) on June 4, no changes in global oil output were announced for the remainder of this year. Now, the oil cartel will reduce overall production targets only from 2024 by a further total of 1.4 million barrels per day (bpd).
However, the output by the world’s top oil exporter will decline to 9 million barrels per day from about 10 million barrels in May, as per its fresh production cuts set to kick in from July. The rest of the OPEC producers agreed to extend earlier cuts in supply through the end of 2024.
Today, OPEC nations produce around 30 percent of the world's crude oil. Saudi Arabia is the largest oil producer within the cartel, producing more than 10 million barrels a day. OPEC+ pumps around 40 per cent of the world's crude and its policy decisions can have a major impact on oil prices.
Also Read: Higher CPI, volatile stocks and yields: RBI explains how OPEC decisions impact Indian economy
How will Saudi's output cut impact India?
Crude oil prices have been declining this year as a result of sluggish global economic growth and declining energy demand. However, as a result of tighter market, oil prices are likely to witness an uptick in the coming months. India’s crude oil consumption has increased seven times accounting for about 5 per cent of world’s total crude oil consumption.
India - a net importer of crude oil which fulfills as much as 85 per cent of its energy needs through imports, may see a heavier import bill if international crude oil prices rise again. India produced a total of 2.5 million metric tonnes (MMT) of crude oil in May 2023, compared to 2.6 MMT in the year-ago period, according to Petroleum Planning & Analysis Cell (PPAC).
Crude oil imports increased by 22 per cent and decreased by 3.1 per cent during May 2023 and April-May 2023 respectively, compared to the corresponding period of the previous year. The net import bill for oil and gas was $10.0 billion in May 2023 compared to $13.2 billion in May 2022, according to PPAC.
Also, oil marketing companies (OMCs) did not significantly increase retail prices last year even after crude reached a peak of $140 per barrel in March 2022. Due to this, the oil refiners registered losses as petrol and diesel rates have been unchanged since April 2022.
For consumers, petrol and diesel prices may not reduce even after crude oil prices decline further this year as OMCs may not lift the freeze on fuel prices. India is the fourth-largest global energy consumer behind China, the United States and the European Union.
The Reserve Bank of India (RBI) in its June 2023 bulletin revealed that India's domestic crude oil basket, equity prices of oil and gas sector firms and sovereign bond yields witness high volatility during the oil output decisions by OPEC+.
Economic indicators such as consumer prices in India and domestic output, along with key financial indicators such as INR, bond yields, and stock prices have shown movements to OPEC+ oil supply decisions.
At the same time, there is a persistent increase in domestic consumer prices in response to an oil supply news shock. The sustained increase in prices is expected to lead to a lower aggregate demand as households and firms are left with less disposable incomes to spend on non-energy goods.
Surprise changes in oil prices can also influence the price and wage-setting in the economy by altering the inflation expectations of firms and households, and so, domestic economic activity falls on impact of such a shock. However, the impact is felt only for a short duration as it reverts to mean quickly, according to RBI.
What lies ahead?
Brent crude futures are down about 15 per cent since the start of the year as rising interest rates has hit investor appetite, while China's economic recovery has faltered after several months of softer-than-expected consumption and output.
On the Multi Commodity Exchange (MCX), crude oil futures due for a July 19 expiry, settled 1.2 per cent higher at ₹5,807 per bbl on June 30, having swung between ₹5,728 and ₹5,841 per bbl during the session so far, compared to their previous close of ₹5,738 per bbl. Overall, prices have been under pressure from rising interest rates in key economies and a slower-than-expected recovery in China.
Analysts predict that oil prices will struggle for traction this year as global economic headwinds linger. Still, some expect the market to tighten in the second half of 2023 partly due to the ongoing OPEC+ supply decisions and Saudi Arabia's voluntary reduction for July.
"Despite the announcements of two fresh rounds of cuts from OPEC /Saudi Arabia, crude prices have largely remained below $80 a barrel as the market has been driven less by fundamentals and more by macroeconomic concerns," HSBC analysts said in a note.
"We think this will continue to be the case for part of the summer, although the deep deficit of around 2.3 million barrels forecast for 2H23 should help to spur some upwards price momentum,'' they added.
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