Saudi Arabia’s Oil and Its Effect On India: report
This month, Saudi Arabia will begin voluntarily reducing its crude oil production due to a tighter market being affected by interest rate increases made by central banks around the world in response to inflationary pressures. Due to slow global economic growth and falling energy demand, crude oil prices have been falling this year.
However, due to tighter supply and Saudi Arabia’s supply cuts, oil prices are likely to increase in the upcoming months. India, which depends heavily on imports to meet its energy needs, could be impacted by rising global oil prices.
Who chose oil producers?
The Organisation of the Petroleum Exporting Countries and its Allies (OPEC+) did not make any changes to the world’s oil production for the rest of this year at their previous meeting on June 4. The oil cartel will now only cut overall production targets by 1.4 million barrels per day (bpd) starting in 2024.
The top oil exporter in the world will see a decrease in output from about 10 million barrels per day in May to 9 million barrels per day as a result of new production cuts that will start in July. The remaining OPEC members decided to continue earlier supply cuts through the end of 2024.
Around 30% of the world’s crude oil is currently produced by OPEC countries. Saudi Arabia produces more than 10 million barrels of oil per day, making it the cartel’s largest oil producer. Around 40% of the world’s crude is produced by OPEC+, and its political decisions can have a significant effect on oil prices.
How will Saudi Arabia’s output reduction affect India?
Due to a slowdown in both the demand for energy and the growth of the global economy, crude oil prices have been falling this year. The tighter market, however, is likely to cause an increase in oil prices in the upcoming months. India now consumes more crude oil than any other country in the world, accounting for 5% of global consumption.
If global crude oil prices rise once more, India, a net importer of crude oil that imports up to 85% of its energy requirements, may face higher import costs.
When compared to the same period the year before, imports of crude oil increased by 22% in May 2023 and decreased by 3.1% in April-May 2023, respectively. According to PPAC, the net import cost for oil and gas decreased from $13.2 billion in May 2022 to $10.0 billion in May 2023.
Even after crude reached a peak price of $140 per barrel in March 2022, oil marketing companies (OMCs) did not significantly raise retail prices last year. Because the price of petrol and diesel has remained the same since April 2022, the oil refineries suffered losses as a result.
Crude oil prices continue to fall this year, consumers might not see a decrease in petrol and diesel prices because OMCs may not decide to end the price freeze on fuel. Behind China, the United States, and the European Union, India is the world’s fourth-largest energy consumer.
According to the Reserve Bank of India (RBI), during OPEC+ decisions on oil output, there is significant volatility in India’s domestic crude oil basket, equity prices of companies in the oil and gas sector, and sovereign bond yields.
Economic indicators like domestic output and consumer prices in India, as well as important financial indicators like the INR, bond yields, and stock prices, have revealed changes in response to OPEC+ oil supply decisions.
In response to a shock regarding the oil supply, domestic consumer prices are also steadily rising. Given that households and businesses will have less disposable income to spend on non-energy goods as a result of the sustained price increase, there will likely be a decrease in aggregate demand.
By altering the inflation expectations of businesses and households, unexpected changes in oil prices can also have an impact on how prices and wages are set in the economy. As a result, domestic economic activity declines as a result of the shock. According to RBI, the effect is only felt for a brief period of time because it quickly returns to its original meaning.
What’s coming up?
Since the beginning of the year, Brent crude futures have decreased by about 15% as rising interest rates have dampened investor interest, and China’s economic recovery has stalled as a result of several months of weaker-than-expected output and consumption.
On June 30, crude oil futures for a July 19 expiry on the Multi Commodity Exchange (MCX) settled 1.2% higher at $5,807 per barrel, having fluctuated between $5,728 and $5,841 per barrel during the session, compared to their previous close of $5,738 per barrel. In general, rising interest rates in important economies and a slower-than-expected recovery in China have put pressure on prices.
As long as there are persistent global economic headwinds, analysts expect oil prices to struggle to gain traction this year. Nevertheless, some anticipate a tightening of the market in the second half of 2023, in part as a result of ongoing OPEC+ supply decisions and Saudi Arabia’s July voluntary cut.
Crude prices have largely remained below $80 per barrel despite the announcements of two additional rounds of cuts from OPEC and Saudi Arabia because the market has been more driven by macroeconomic worries than by fundamental factors, according to HSBC analysts.
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“We believe this will persist for a portion of the summer, although the significant shortfall of approximately 2.3 million barrels anticipated for 2H23 should help to spur some upward price momentum,” they continued.