Crude oil: OPEC+ move may push world to the brink

An offshore drilling rig. The future of crude oil prices is dependent on the outcome of the Russia-Ukraine war.

Within a week of the OPEC+ announcement of an output cut, crude oil prices have shot up by 10%. With the latest cut by crude oil exporters, the effective supply cut now is nearly three million barrels per day. This is more than 3% of the global daily demand. The timing of the decision couldn’t be worse for the oil consuming economies across the world that are struggling to keep inflation under control by raising interest rates. The OPEC+ move will have a bearing on global growth. The International Energy Agency has termed the OPEC decision risky for the global economy.

For India, this means the already high prices may inch up further, leading to higher import bills. Commerce and Industry Minister Piyush Goyal said that the production cut is likely to put an upward pressure on the prices. Higher oil prices will translate into inflationary pressure on other commodities and burden on common people. India will feel the strain on its balance of payments as it is heavily dependent on overseas supplies to meet its energy requirements.

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Right after the OPEC+ announcement, prices rose from about $73 per barrel to $86 per barrel for the benchmark Brent crude. The situation stabilised slightly in the following days, but crude is now ruling at around $85.

India is an energy guzzler and relies heavily on both coal and crude oil to meet its energy requirements. In fact, the nation is the world’s third largest oil importing nation. It meets 85% of oil needs through imports. New Delhi spent $118 billion on oil imports in the first 11 months of the 2022-23 fiscal. Even though New Delhi has been securing discounted Russian crude, it won’t be able to overcome the higher costs of total oil imports during 2023-24. India’s crude oil import bill for the fiscal 2023 is expected to touch $200 billion. This is nearly 60% higher than the last fiscal.

Why is OPEC+ cutting down production

The Saudi Arabia-led cartel assumes that business activity will slow down soon due to the risk of recession which means the demand for crude oil will also drop. The cartel has hence decided to inflate prices when the demand is still robust. This simply means better profits the cartel before the world economy slips into a recession. However, in its bid to secure profits, OPEC+ is only playing the part of a catalyst in slowing down business activity. With costlier fuel, everything becomes more expensive and hence inflation rises while growth slows down.

Before the OPEC+ decision, the world economy was benefiting from moderate oil prices. Major importers like India and Japan saw a fall in domestic retail prices for a few months.

There are other reasons for OPEC+ to prop up crude prices. With a series of bank collapses in the United States, there is a risk of contagion to other vulnerable banks which may soon become a full-blown banking crisis. This will also impact international banking systems and depress oil markets. Not helping the matters for OPEC is a slow but gradual shift by world economies to renewable energy sources. This puts OPEC in a tight spot and the cartel is compelled to build up sufficient industrial infrastructure to face such a future. Many OPEC countries solely rely on income from crude oil and do not have other revenue sources.

Crude oil price outlook

The global economy is still very fragile due to the ongoing war between Russia and Ukraine. Several emerging countries have difficulties with economic growth. The future of crude oil prices is heavily dependent on the Ukraine war and an end to it may bring a softening trend in world markets. However, the threat of recession in the US or Europe poses a risk. Analysts at Goldman Sachs had earlier projected that prices would reach $100 by the end of 2023, but have now revised it to $95. The prices are expected to hover around the $80-90 per barrel for most of the year.

OPEC currently has 13 member countries which account for an estimated 44% of global oil production and 81.5% of the world’s proven oil reserves. OPEC+ refers to the 13 members of the Organisation of Petroleum Exporting Countries and 11 other non-OPEC crude oil exporters.

The output cut announced on April 2 is the first by OPEC+ since 2018. The US, reeling under runaway inflation and facing the prospect of a full-blown recession, is upset about the cut. But a determined OPEC+ can keep the prices high, aided by the disruptions triggered by the Ukraine crisis.