CHENNAI: While the tussle between Russia and Saudi Arabia in the OPEC+ alliance contributed to a prodigious drop in crude oil prices last March, the latest rift in the oil exporters’ cartel between the United Arab Emirates (UAE) and the Saudi kingdom is contributing to a run-up in oil rates.
After the OPEC+ alliance, which comprises the 13 members of the Organisation of Petroleum Exporting Countries (OPEC) and 10 other major exporters such as Russia and Kazakhstan, failed to reach a decision on increasing production during their meeting on Monday, crude oil prices gained sharply—brent crude breaching the $77-per-barrel-mark.
Analysts expect crude oil prices to continue rising if the alliance fails to reach a consensus on increasing production further. With retail fuel prices already at an all-time high and rising unabated, costlier oil spells trouble for India. On Tuesday, the price of petrol in Delhi stood at Rs 99.86 per litre, while diesel was priced at Rs 89.36. In Mumbai, prices stand at Rs 105.92 and Rs 96.91 per litre respectively, while in Chennai they are at Rs 100.75 and Rs 93.91.
For the Union and state governments, which have sharply increased their dependence on fuel taxes, such a rise would force a choice between accepting lower tax revenues at a time when pandemic-related relief requires large scale spending, or allowing retail fuel prices to keep rising, leading to widespread price rise across the board.
India’s retail inflation has already surged from 4.23% in April to 6.30% in May, which is above the RBI’s comfort level of 2-6% —the first time in six months that this upper bound has been breached. The current rift at the OPEC+ revolves around the interests of two of the world’s largest oil exporters.
On one hand, Saudi Arabia is pushing for a 2 million barrel per day increase in output between August-December 2021, but wants the remaining supply cuts (first made last summer) to extend to the end of 2022. However, UAE believes that a cut in output beyond the initially agreed-upon deadline of April 2022 would be “unfair”. And the proposed deal, which UAE is refusing to agree to, it has to proportionally cut its oil production by 18%, while Saudi Arabia would cut its output by 5%.
According to global brokerage UBS, if no agreement is reached, oil prices are likely to climb over $80 per barrel by this September, and analysts at Citi group agree. However, Citi also noted that high prices would hamper global economic recovery.