The ongoing West Asia conflict has sparked fears of supply disruptions resulting in an oil price rally while demand slowdown in China and India is raising fears of a likely crash in prices
Global crude oil prices have remained volatile for more than a month now, rising and falling sharply on both demand and supply concerns. On the one hand, the ongoing West Asia conflict has ballooned, sparking fears of supply disruptions. On the other hand, demand slowdown in China and India is raising fears of a likely crash in prices.
This two-way pull has ensured that Brent oil price stays in a range of USD 70-80 per barrel.
In September 2024, benchmark Brent oil prices fell to a 14-month low at around USD 72 per barrel amid concerns over China’s demand slump. The dragon nation is running a risk of not meeting its long-term growth target of 5 per cent owing to massive downturn in the property sector and consumption slowdown.
As a result of this, the world’s second largest economy is mulling over fresh stimulus by issuing government debt to significantly fund subsidies to people with low incomes while also lending a support to its crisis ridden real estate market.
To add to the woes, there is a danger of one more front getting opened in the form of India.
The nation’s oil consumption fell for the second straight month in September. A consumption hit in the world’s third largest consumer of crude oil, could potentially weigh on the global prices, bringing it down.
A media report cites that Indian oil ministry data which suggests that the Indian consumption of refined petroleum products fell 1.6 per cent year-on-year in September, driven by a surprise 1.8 per cent contraction in diesel demand. In August, total refined products consumption fell 2.6 per cent and diesel declined by 2.5 per cent year-on-year, the same report says.
This is a worrying trend at a time when the festive season has just begun. It is not just a blow to the oil sector but could also affect the Indian economy.
For the record, sales of diesel have grown 1.7 per cent annually in the past five years.
The USA is the largest consumer with a daily oil consumption at 19.7 million barrels per day, followed by China with 12.8 million barrels per day. India consumes roughly 4.4 million barrels per day and is followed by Japan which has a consumption of a little over 4 million barrels.
While oil prices fell by 24 per cent in September, it shot back in October by nearly 10 per cent. Supply cuts undertaken by OPEC+ nations have also helped the group of about two dozen oil-producing countries led by Saudi Arabia and Russia to sustain prices amid drop in demand. It has kept about 5 per cent of the global supplies off the market.
The Dichotomy
There is a dichotomy, which is the war that has kept the pot boiling.
So far, Israel had been dealing with the Palestine, extending its reach to Hezbollah in Lebanon and Houthis in Yemen; besides militias in Iraq and Syria. The equation has pulled in Iran into the conflict, directly.
A more direct conflict where Israel starts targeting Iran’s oil installations could worsen the situation and lead to spiralling in prices to nearly USD 200 a barrel according to estimates. This is a worst-case scenario, however. Another pressing issue at the moment is the potential danger to the Strait of Hormuz getting blocked. A waterway stretch between Iran and Oman, which is a vital transit point for oil and is currently under the global spotlight.
Its importance could be gauged from the fact that the trade through this route accounts for a fifth of the global oil business. The US Energy Information Administration (EIA) data of 2022 suggests that the oil flow through the Strait of Hormuz averaged 21 million barrels per day which translates into 21 per cent of the global crude trade.
Estimates by energy analyst state that the oil prices could climb above USD 100 per barrel in the event of blockade in this route.
The Currency Conundrum INR fell past 84 against the US dollar recently, recording an all-time low. If the rupee’s decline continues, the country’s import bills will rise which may not be a very healthy situation for the consumption.
Low oil prices benefit oil marketing companies (OMCs) as they have the opportunity to improve their refining margins. In India’s case, the prices of petrol and diesel have not changed for years, irrespective of the trajectory crude oil prices have taken. Although they have been largely benign.
If the war situation deteriorates further and oil prices go up, margins will get hit adversely if the government does not increase petrol and diesel prices.
Inflation into the Play
The impact of high crude oil prices towers over all other factors when it comes to inflation and the recent history is a reference point. When the Russia-Ukraine war started in 2021, the worst hit were food and energy prices. A repeat of that situation would be catastrophic for all economies.
We have been in an era of very high-interest rate regime and are now on a path to reverse it. Any uptick in this respect will undo all the efforts that have been made to control inflation, so far.
A softer oil price could hurt some economies but will serve larger global good. With the receding US influence we do not know who could broker peace between Israel and the countries it has been in conflict with.
