ALL HOPES PINNED ON EXPECTED MARKET STABILITY
The spurt in global oil prices could not have come at a worse time for India. The benchmark Brent crude at the Intercontinental Exchange (ICE) futures market traded at $67.02 a barrel at the beginning of the week, up 0.22 per cent over the previous session.
Consequently, state-run oil marketing companies (OMCs) have been marking up petrol prices daily, with similar hikes in diesel as well as kerosene. The price of non-subsidy cooking gas has been raised by Rs 19 per cylinder, the fifth straight monthly hike, adding up Rs 139.50 since September.
The aviation turbine fuel (ATF) price has also been jacked up by 2.65 percent, which makes the price hit the highest level since June last year. This is the second straight increase in a month, as the price was raised earlier on December 1. The higher cost of aviation fuel will have its bearing on the fortunes of the airlines companies, and the industry, which is already going through a grave crisis.
To make the picture complete, the Modi government had just effected a raise of non-suburban train fares by about 25 percent, although in terms of the actual price the cost per kilometre is only 4 paise.
The overall impact of the hikes on the general price situation would be much higher than the increase in the individual items as the confidence level in the economy has already hit a low, with demand drying up in almost every sector of the economy.
The timing of the spurt in crude oil prices has become critical for India, as the economy had started showing feeble signs of a recovery in some sectors. This dampens optimism for a possible turnaround as the latest figures on GST collections have shown the second straight monthly increase, indicating a slight recovery in consumption demand. The total collection of GST revenue in December has come at Rs 1.03 lakh crore, which is almost nine per cent more in comparison to the amount collected in the same period last year.
The firming up of crude prices has occurred in the wake of the 14-country OPEC bloc, Russia, and a host of other OPEC+ countries agreeing on 6 December 2019 to bump up the group’s target oil-production cuts by over half a million barrels per day, from 1.195 million to 1.699 million bpd, effective 1 January 2020.
The decision instantly had its reflection on the crude prices, showing small but, consistent increases in the days that followed. Naturally, it had its fallout in consuming countries like India, which has already been down in the dumps due to indifferent performance by the core sectors of the economy, thanks to a series of government decisions based on questionable logic.
The only saving grace in the current spell of increase in the global oil market is its uncertain longevity, which is vouched for by insightful market specialists. Leading independent energy consultant Rystad Energy has advised OPEC ‘not to get too excited’ as it sees the cartel’s decision as providing only a ‘light bandage to get through the first quarter of 2020’.
It has concluded that deeper cuts may be needed and the conclusion is based on the agency’s bottom-up supply analysis, which points to a surplus of oil barrels sloshing around despite the most recent OPEC+ policy.
Rystad Energy expects the oil market balance outlook to be further challenged later in the year, after the initial effect of the new IMO 2020 marine fuel regulations wears off and demand fears creep back into the market. We therefore see our call-on-OPEC at an average of 28.9 million bpd for the subsequent three quarters.
The market looks nearly balanced for 1Q20 with 0.3 million bpd of implied stock builds, and if a positive effect from IMO 2020 on crude demand to the tune of 0.3 million bpd in 1Q20 is included, the market should balance itself in the first months of 2020. According to Rystad, this could mean that come March, OPEC+ may be forced to cut even deeper to balance the market for 2020 as a whole.
“Worryingly, for the last three quarters of 2020, the call-on-OPEC is forecast to average 28.9 million bpd on the assumption of a positive IMO effect, but only 28.3 million bpd without our expected 0.6 million bpd IMO effect on crude demand. In other words, the implied production target for OPEC of 29.2 million bpd is likely not low enough to avoid stock builds and downward pressure on oil prices, putting the $60 Brent oil price environment in jeopardy in 2020,” Bjornar Tonhaugen, head of Rystad Energey’s oil market research, avers.
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