The ‘Crude’ Question: Despite restricted supply, can oil sustain at $100/bbl?

International crude oil prices have rallied more than 10 per cent and sizzled to 10-month high levels after oil producers Saudi Arabia and Russia extended their voluntary output cuts of a combined 1.3 million barrels per day (bpd) till the end of the year. 

Brent futures rose to a record $94.63 mark in the week ended September 15, their highest since November 2022. Oil prices are also on track for their biggest quarterly increase since Russia's invasion of Ukraine in the first quarter of 2022, according to news agency Reuters.

However, prices have now retreated to $93 per barrel as markets weighed supply concerns stemming from Russia's fuel export ban against demand woes from future rate hikes. Last week, Brent futures settled 3 cents lower at $93.27 a barrel. It fell 0.3 per cent in the week, snapping a three-week winning streak.

US West Texas Intermediate crude (WTI) futures rose 40 cents, or 0.5 per cent, to $90.03 a barrel, as US oil rig counts fell. The benchmark fell 0.03 per cent for the week, the first decline in four weeks.

Also Read: ‘Crude’ impact on economy: $10 rise in Brent widens India's CAD by 0.5%, say analysts as oil sizzles to 10-month high

Oil prices are expected to trade higher and can touch above $95, but market analysts reckon that prices sustaining above $100 is questionable. ‘’Markets fear that this trend could spur more cooling in the US economy, potentially denting crude demand,'' said domestic brokerage firm Motilal Oswal.

US fuel demand is also expected to cool in the coming months, with the end of the travel-heavy summer season. Biden administration is keen to keep pump prices in check ahead of the presidential election next year, where inflation and fuel costs have already become areas of attack for Republican party, according to the brokerage firm.

Earlier this month, oil producers Saudi Arabia and Russia extended their voluntary oil output cuts of a combined 1.3 million barrels per day (bpd) to the end of December 2023. These are on top of the April cuts agreed by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) running to the end of 2024.
 

Oil above $100/bbl-mark unlikely: What's weighing on crude prices?

-Even though higher oil prices would help Saudi Arabia balance its budget and Russia fund its war machine, triple-digit oil prices could cause US shale producers to increase their supply to lower prices. Also, higher prices could drive more investment into clean energy.

-The total US crude oil inventories, including the Strategic Petroleum Reserves (SPR), just fell below 800 million barrels. Refilling the SPR would involve either buying expensive oil or a large drop in oil prices. Both of which are unlikely to occur anytime soon, according to analysts.

-US Federal Reserve officials warned of further rate hikes, even after voting to hold the benchmark federal funds rate steady at a meeting this week. Higher interest rates increase borrowing costs, which could slow economic growth and reduce oil demand.

-The world oil inventories, having depleted sharply this quarter, are set for an even steeper drop of roughly 3.3 million barrels per day (mbpd) in the next three months. This could be biggest inventory drawdown since at least 2007.

-Russia temporarily banned exports of gasoline and diesel to all countries outside a circle of four ex-Soviet states with immediate effect in order to stabilize the domestic fuel market, the Russian government said last week.

-Even after doubting oil price sustainability above $100-mark, brokerages and market analysts still do not completely rule out the possibility. ‘’Any surprise cut by OPEC+ once again can bring further positive momentum and push prices higher above $100,'' said Motilal Oswal.
 

How does crude oil price movement impact Indian economy?

-India fulfills as much as 85 per cent of its energy needs through imports, may see a heavier import bill if international crude oil prices keep rising throughout the year. Heavier crude rates pushes the US dollar above against its peers, which in turn, is a downside for the Indian rupee. A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

-High crude prices are said to have a domino effect on the economy, as the price shocks are instantly passed on to the macroeconomic indicators. Current account deficit (CAD) is a key indicator of the balance of payment of a country and in the current scenario of the momentum picked up by crude rates, every $10 dollar rise in Brent futures potentially widens the CAD by 0.5 per cent.

-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.

-The sustained increase in prices may lead to a lower aggregate demand as households and firms are left with less disposable incomes to spend on non-energy goods. This is how domestic consumer prices respond to an oil supply news shock.

-Analysts observe that a sharp increase in crude oil prices disrupts India's balance of trade, making it more vulnerable as a net oil importer. ‘’This heavy reliance on oil imports has driven up energy costs, putting pressure on the stability of the Indian rupee,'' said Arvinder Singh Nanda, Senior Vice President, Master Capital Services Ltd. The combination of higher living costs and a depreciating currency is discouraging both domestic and foreign investments.