What has changed in the global oil market and will it be sustained?

With the current rebalancing in the oil markets under way, the outlook for crude oil prices appears bright. Graphic: Naveen Kumar Saini/Mint

Crude oil prices are showing strength—not a good news for India, considering we import most of our oil requirements. Cast your eyes on the chart alongside. The Indian basket of crude prices in rupee terms increased as much as 16% from 1 to 27 September. In dollar terms, the basket has risen about 13% during the time. The depreciation in the Indian currency has meant that prices in rupee terms have increased faster.

But why are benchmark crude oil prices rising in the first place?

There has been a fair bit of commentary on the demand as well as the supply side supporting the strength in crude oil prices. Firstly, the outlook on oil demand growth has improved. Estimates of global oil demand growth in 2017 have been revised up again, this time by 0.1 million barrels per day (mb/d), to 1.6 mb/d, as June quarter numbers were particularly strong, pointed out International Energy Agency (IEA) in its latest oil market report.

IEA said oil demand grew by 1.2 mb/d year-on-year in the March quarter, and accelerated to 2.3 mb/d in the June quarter, due to a combination of robust demand from developed and emerging market economies.

There is good news on the supply front too. The Organization of the Petroleum Exporting Countries (Opec) and non-Opec oil exporters are complying with the production cuts, which hasn’t happened very often in the past. According to Sugandha Sachdeva, vice-president (Metals, Energy and Currency Research) at Religare Securities Ltd, “There is also growing optimism in the market that Opec might consider extending output cut agreement beyond March 2018, which will tighten the oil markets.”

With the current rebalancing in the oil markets under way, the outlook for crude oil prices appears bright. In fact, “Brent crude has breached the crucial barrier of $55 a barrel and is expected to tread further on the higher trajectory towards levels of around $65-68 a barrel by year-end,” says Sachdeva.

But here’s what can alter things. Historically, Opec nations aren’t known to cooperate among themselves when it comes to output. Latest data from Bloomberg shows Saudi Arabia’s spare capacity stands at about 1.5 mb/d. The world oil deficit, according to the US Energy Information Administration, for August stood at 0.35 mb/d. With increasing geopolitical tensions in the Middle East, if Saudi Arabia decides to produce more, then there will be downward pressure on prices. Secondly, there is also the US shale oil output to watch out for. Shale producers are locking in higher oil futures prices, which indicates that oil supply from shale will increase. These factors are likely to play an important role in determining whether firmer oil prices are here to stay for good.

For India, higher oil prices mean further pressure on growth.

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