By K Raveendran
After a brief scare, domestic petroleum prices are showing a declining trend. That is certainly a point of consolation for the Modi government, which is facing trouble for the economy on all possible fronts.
But new analysis of the emerging global oil market suggests that oil prices would continue to be under pressure for most part of the year. The reason cited is the China-origin coronavirus attack.
While the outbreak will have serious implications for global economic growth, the effect of which will be felt by the Indian economy as well, the prospects of continued decline in oil prices will provide a much-needed relief to the managers of the Indian economy.
The latest assessment by independent energy consultancy Rystad Energy is that the coronavirus outbreak in China will curb global oil demand growth by at least a quarter this year, and the production cuts of 600,000 barrels per day (bpd) proposed by an OPEC+ committee are far from enough to balance the market.
Both the first and second quarters of 2020 will see global oil production surpluses. The latest estimate shows that the first quarter of the year will see producers left with a stock build of 700,000 bpd. The previous estimate was for a more or less balanced first quarter with a 100,000 bpd surplus.
The second quarter threatens to build oil stocks by 1.3 million bpd unless production is reduced further. That means that even if the OPEC+ output cuts are implemented in the second quarter, there will still be a sizeable surplus of 700,000 bpd.
The economic shut-down in China is expected to cause the largest negative oil demand shock since 2008. Experts feel that even if OPEC’s output cuts are fully applied, they will not be enough to fill the demand gap exacerbated by the coronavirus.
For the rest of the year, the third quarter looks a bit better for balances as some pent-up demand growth in China is expected in both products and crude. However, fourth quarter balances suggest continued pressure on the market and OPEC+ despite the warranted extension of the current output agreement through year-end.
The expected imbalance is expected to play out in the form of a downside risk to the earlier forecast of $58 Brent base for 2020. In view of the uncertainty of the duration and related consequences of the coronavirus outbreak in China, Rystad has identified additional risks that could potentially widen the global supply surplus and downgrade the previous oil price forecasts.
The new year had begun on a bad note for oil consumers as fuel prices continuously spiked in the wake of Iran-US tensions. Brent prices rose over 4 percent on a single day after US airstrikes killed major general Qasem Soleimani of the Islamic Revolutionary Guard Corps at an airport in Iraq, heightening geopolitical tensions.
But as the epidemic in China triggered restrictions in the country’s public transport and air travel, both at a domestic and an international level, reducing demand for oil, the commodity has lost a fifth of its value already.
Another downside risk is constituted by the economic slowdown in India. China and India together account for a major swing factor in oil demand and anything that affects economic activity in the two countries will impact negatively on the oil outlook.
Rystad had talked about the additional downside risk to short-term oil demand growth from a macro-economic perspective of India as weak economic indicators emerged from India – one of the main engines of demand growth. Consensus GDP forecasts had put Indian GDP growth at just 5% this year, 0.5 percentage points lower than in the previous forecast, but these estimates have further come down in view of the continuing slowdown.
The prospects of lower oil price come as a boon for India as the country imports 1.5 billion barrels of crude every year. As such, every $10 increase in per barrel crude price is estimated to expand India’s current account deficit by 0.4 per cent of GDP. Every 10 per cent increase in crude oil prices can also lead to rise in inflation rate by 20 basis points. Higher crude prices also mean increased dollar demand, which in turn hurts the rupee-dollar exchange rate. (IPA Service)