INSUBCONTINENT EXCLUSIVE:
NEW DELHI: Crude oil prices hit a fresh five-month high on Tuesday after the Trump administration decided not to extend the waiver that it
had granted to India and seven other countries on Iranian oil imports beyond the May 2 deadline
Analysts say crude prices may rise to the $80-85 range in the short term, but it remains to be seen if such a rally can sustain for
long.
On Tuesday, Brent futures for June delivery traded 0.6 per cent higher at 74.51 a barrel, up 37 per cent from the December 31 price of
$54.57 a barrel.
The US curbs do not bode well for India, a key importer of Iranian crude, and the impact could be felt across the economy
and financial markets.
Domestic equity indices tanked on Monday after the first report about the US decision
The indices had seen a smart rally thanks to a Rs 63,000 crore inflow of foreign portfolio investment so far this calendar
Should the crude rally persist, it will put pressure on the domestic rupee, which will in turn slow down FII flows.
India meets over 80 per
cent of its oil demand through imports
A rise in crude oil prices increases dollar demand, which then hurts the rupee-dollar exchange rate
Fuels have 2.3 per cent weightage in CPI inflation and every 10 per cent increase in crude oil prices can push up the inflation rate by 20
basis points.
Widening CAD and inflationary pressures can push the central bank to adopt a hawkish stance
For India, this could be an added problem, as the market might be partly factoring in a third rate cut in the June policy review.
A spike in
crude oil prices also increases working capital requirements, operating cost and raw material cost for user industries such as chemicals,
automobile, consumer staples, paints and lubricant manufacturers.
Analysts say the curbs on Iranian crude can push up crude oil prices to
the $80-85 a barrel range
Only expanding US supplies can tame such a price rise as any move by Opec and its allies to improve supplies may not be sufficient to make
up for the gap in Iranian output.
OPEC output hike may not be enoughData showed combined crude output from Iran and Venezuela, another
sanctions-hit country, dropped by 5,00,000 bpd (barrels of oil per day) in March quarter.
Commodity analysts attributed the current oil
price rally to US sanctions on the two oil producers along with potential supply shocks from Libya and Algeria and a pledge by OPEC and its
allies to cut output by 1.2 million barrels per day (mbpd).
Algeria is North Africa's largest oil and gas producer while Libya produced 1
mbpd of crude in 2018.
While White House has assured that the Opec will make up for deficit in Iran oil, analysts have doubts
To make up for the fall in Iran exports and ensure demand-supply balance, OPEC output would need to be 2 mbpd higher than that in March
brokerage said OPEC may surely raise output, but not by 2 million barrels a day, which may mean supply deficit in June quarter, leading to a
spike in crude prices.
Sameer Kalra of Target Investing sees crude moving towards the $80-85 a barrel range in the short term.
Can rising US
exports cap pricesAny rise in crude oil prices for now may not be steep
Analysts say US crude oil output averaged at 12.2 mbpd in March, a jump of 3 mbpd from early 2017 level
US Energy Information Administration (EIA) is expecting US output to surpass 13 mbpd in 2020.
US output shot up by 3.8 mbpd from the low of
8.4 mbpd during the third quarter of 2016
YES Securities said the breakeven production price for US Bakken crude oil is estimated to be around $42 a barrel, which is reasonably lower
As a case in point, US oil output has surged 3.3 mbpd since December 2016
depleting their inventories
The current price is at the higher end of the demand-supply equilibrium and, therefore, has all the potential to come down by around $5 per
point, stock prices would not see too much of turmoil, he said.
Manglik said there is no fixed threshold level one should watch out for, as
the impact of rising crude prices largely depends on how the government tackles the situation.
Rising crude oil prices has a negative impact
adversely impact a number of sectors, including OMCs, paints, automobile and cement, if companies fail to pass on the higher cost
Nonetheless, the benchmark indices are currently factoring in a win for the incumbent government and it may not react very negatively on the