MUMBAI: Global crude oil prices, after having been benign and lending a helping hand to India’s fisc, turned around in 2018 to spook the fiscal math. Widespread consumer discontent forced the government to roll back excise duty marginally and reimpose a nominal subsidy burden on petrol and diesel over state-owned refining and marketing companies. India’s import dependence too grew as domestic oil production fell 3.7 per cent in the first eight months of the current fiscal, even as product demand rose 3 per cent in the same period.
Fearing tightness in oil markets ahead of the November deadline for US sanctions against Iran, oil prices surged to a four-year high of USD 86.74 a barrel on October 3. The average price of Indian crude oil basket rose from USD 56.43 a barrel in the last financial year to USD 69.22 per barrel in April and moving up to USD 80.08 per barrel in November.
Since October, the prices have plunged by over 40 per cent and slipped below USD 60 per barrel mark as markets got into Christmas-New Year holiday mood. This is the lowest the crude has hit since July 2017 and is a result of various factors, main of course the fear of economic slowdown in the US, and the US-China trade war.
“A lot would depend on how the US-China trade talks pan out and how the US Federal Reserve sets its course for 2019. We expect OPEC/non-OPEC producers to reach full compliance with their latest cut by March at the latest. We will update our outlook next month, based on how these factors evolve,” says Vandana Hari, in her latest Vanda Insights Viewsletter on 2019 Q1 outlook.
If the US-China dispute is not resolved by March 1, Hari would put the scenario in the “neutral to bearish” category for crude oil. The continuation of US-China tariff war, slowdown in the biggest economy and bearishness in the financial markets would weigh heavily on the crude oil price, keeping it subdued. However, production cuts and any OPEC decision before or at its next April meeting, production declines from Iran, Venezuela or other key markets can push crude prices up in the first quarter of 2019.
“ICRA expects increasing shale oil production in the US to weigh on the price of crude oil. However, OPEC and Russia’s increasingly active management of supply through production cuts is expected to keep the prices of crude oil elevated,” said K Ravichandran, Senior Vice President and Group Head-Corporate Ratings, ICRA. Barring any geopolitical shocks, crude oil price would hover in the region of USD 55 per barrel to 75 per barrel, a broad range, he indicates.
While India’s production isn’t likely to see any big pick up, the product demand could surge as elections near and a stable or crude under USD 75 per barrel would be a boon. Otherwise, it would threaten the subsidy calculations of the government on LPG and kerosene and keep oil companies on tenterhooks about any additional subsidy burden.