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Why crude prices are on the rise again
Global crude oil prices have risen substantially in the past 30 days, inching toward the $90 a barrel mark and igniting concerns of higher inflation in both international and domestic markets. On January 20, Brent crude oil was trading at $86.95 a barrel in the international market. Oil prices have moved up by around 30 per cent since the end of November on stronger-than-expected demand despite the third wave of the pandemic, and supply outages that have tightened the market. This has led to buyers in Asia paying sharply higher premiums for spot cargoes. Goldman Sachs Group has predicted that crude oil prices will touch the $100 mark in the third quarter of 2022, and the International Energy Agency (IEA) has said that demand is on track to hit pre-pandemic levels. Oil was at $69 a barrel on December 1.
The immediate rise in prices was sparked by renewed tensions in the Middle East following a drone attack on three oil tankers in Abu Dhabi that killed three people, including two Indians, and wounded several others. Yemen’s Houthi rebels have claimed responsibility for the attacks. Hours later, Saudi Arabia retaliated by launching air strikes at targets in the Yemeni capital of Sanaa, triggering a fresh spate of violence in the region that sent oil prices soaring.
Meanwhile, the massing of troops by Russia near the Ukraine border is cited as yet another reason for the oil market to heat up, as the West fears a Crimea-style annexation attempt by Russia in the region. Russia, meanwhile, has denied having any such intent, but has demanded guarantees from the West that NATO will not expand to Ukraine and other former Soviet nations or place its troops and weapons there.
In India, higher oil prices should have led to an increase in fuel prices. However, oil companies are yet to pass on the higher crude prices to consumers. Analysts do not expect the government to increase petroleum prices anytime soon, considering that five states are going into assembly elections in February. But going forward, the rise in crude prices will lead to higher fuel prices in India.
In early November, the Centre had cut excise duty on petrol and diesel by Rs 5 and Rs 10, respectively, following criticism that the government was continuing to tax fuel heavily, leading to high prices. This was followed by reduction in value added tax on fuel by several states. Petrol prices still continue to be high in some cities, reigning at Rs 110 in Mumbai, Rs 101.40 in Chennai and Rs 104.67 in Kolkata on January 20. It is priced at Rs 95.41 in New Delhi. Diesel, meanwhile, cost Rs 86.87 a litre in New Delhi, while it cost Rs 94.14 in Mumbai on January 20. Analysts estimate that every $10 rise in crude prices will increase the fiscal deficit by 10 basis points. High crude prices, therefore, can upset the fiscal calculations of the Union government close to the Budget presentation on February 1. It may also compel the Reserve Bank of India to withdraw from its accommodative monetary policy stance or easy monetary policy stance, that allows it to expand overall money supply to boost the economy when economic growth is slowing down. In its last monetary policy review in early December, the central bank had held on to key interest rates, on concerns that any lowering of rates will further fuel inflation.
According to the IEA, crude oil prices increased in 2021 as rising Covid vaccination rates, loosening pandemic-related restrictions, and a growing economy resulted in global petroleum demand rising faster than petroleum supply. The spot price of Brent crude oil, a global benchmark, started the year at $50 per barrel and increased to a high of $86 per barrel in late October before declining in the final weeks of the year. It has since then risen again, touching $88.44 a barrel on January 19. The IEA said that Brent’s 2021 annual average of $71 a barrel is the highest in the past three years. The price of West Texas Intermediate (WTI) crude oil traced a similar pattern to Brent and averaged $3 per barrel less than Brent in 2021. On the other hand, global petroleum production increased more slowly than demand, driving prices higher. The slower increase in production was mostly attributable to crude oil production cuts by OPEC or the Organisation of Petroleum Exporting Countries and some other nations including Russia (referred to as OPEC+) that started in late 2020.
On November 23, India said it will release five million barrels of crude oil from its strategic petroleum reserves in a concerted effort with other major oil consuming countries such as the US, China, UK, Japan and South Korea, to bring down global crude oil prices. The US, meanwhile, said it will release 50 million barrels of crude oil from its strategic petroleum reserves in the next several months. The UK has said that it would release 1.5 million from its reserves. China and Japan did not disclose a specific number for the reserves they would be releasing. In all, around 70-80 million barrels of oil will be released by these countries in a co-ordinated fashion over six months, which would translate into 400,000 barrels a day. However, this measure has not proved to be helpful. What is being released by these countries is a very small amount, considering that global oil demand is 97 million barrels a day and OPEC produces around 30 million barrels a day. The coming days may witness a further rise in crude oil prices, with the IEA already hiking its oil demand growth forecast for the coming year by 2,00,000 barrels a day.
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