By Arjavi Indraneesh
When Modi assumed office in 2014, he was particularly lucky that the oil prices were at a most comfortable level, which helped his government to handle the sensitive fiscal deficit problem with great success. But his second term, which looks almost a foregone conclusion ahead of the counting of votes, might see luck turn into a curse.
Although his government came under the weather half way through its tenure due to oil prices spiralling out of control around the time of the assembly elections in Karnataka, Madhya Pradesh, Rajasthan, Chhattisgarh and a few other places, which saw the ruling party suffer serious setbacks, Modi’s oil stars had become benevolent once again as the 2019 Lok Sabha elections approached.
But by all indications, his luck on the oil front is running out and the new government will have some tough calling to take. Oil analysts now see oil price risks rising to precarious levels. The rising tension in the Middle East and the critical oil tanker waterways in the region have prompted analysts to talk in terms of Brent crude hitting $80, or even $100 a barrel, compared to the current level of around $72.
According to Rystad Energy, an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry, supply disruptions in the Middle East on top of an already tight crude market could send oil prices violently upward.
The fears have been accentuated by the attack on two Saudi oil tankers off the coast of the United Arab Emirates and some Saudi oil installations over the last weekend, sending crude futures sharply up.
“In the short term, the perceived risk of supply disruptions from the area will only add to the premium of short-dated oil contracts compared to deferred contracts on the futures curve, which are already trading at a high premium,” Bjornar Tonhaugen, Head of Oil Market Research at Rystad Energy, said.
The tightness in prompt supplies is caused by declines in production from Iran and Venezuela, along with ongoing OPEC cuts, outages in Russia owing to the Urals contamination, maintenance in Kazakhstan, plus planned maintenance in the North Sea during the summer months.
“The oil market is reacting today not because the physical market suddenly has lost more oil supplies, but because of risks that the market may lose more oil in the coming weeks and months given the heightened risk of supply disruptions from the critical Persian Gulf region. Raising tensions even higher, news flows suggest the latest incident might be related to the conflict between Iran and the US, which puts the Strait of Hormuz in play,” Tonhaugen said.
Around 40 percent of the world’s traded crude oil is transported through the Hormuz waterway between Iran to the north and UAE-Oman to the south. Approximately 90 percent of Saudi Arabian crude exports and 75 percent of Iraqi exports pass through this shipping lane, in addition to all oil exports from Iran, Kuwait, Qatar and Bahrain.
Meanwhile, the US waiver of sanctions on buyers of Iranian oil ended on May 1, which has prompted Iran to renew its threat to close the Strait of Hormuz. Tension between Washington and Teheran has since mounted, with President Trump making menacingly provocative statements against the Islamic republic and Teheran returning the compliments in full measure.
Iran has repeatedly threatened to ‘block’ the strait as a ‘weapon’, but due to the importance of the waterway for the global economy and the price of oil, the strait is also protected by the US Navy’s Fifth Fleet and other allies.
“Needless to say, if the strait was to be blocked or disrupted, even only for a short period of time, oil prices would react violently upwards. There are limited bypass options to export crude, although Saudi Arabia and the UAE do have limited pipeline capacity to shift some crude exports to the Red Sea or the Gulf of Oman,” Tonhaugen pointed out.
As far as supply risks are concerned, India has nothing much to worry about its inability to access Iranian crude as it has diversified the supply sources. India has a strategic partnership with the UAE, which supplies about 6 per cent of its crude imports.
Should things come to a crunch, Abu Dhabi has secured its oil exports by building a strategic pipeline to the northern emirate of Fujairah, opening up a new supply route to the Indian Ocean bypassing Hormuz.
But India has a lot to worry about when it comes to the possible impact of a blockade enforced by Iran. As the country imports more than 80 per cent of its oil requirements, every dollar per barrel change in crude oil prices is estimated to raise the import bill by Rs 823 crore. A similar impact will be exerted when the currency exchange rate fluctuates by one rupee per dollar.
According to known estimates, every $10 per barrel rise in oil price will worsen India’s fiscal balance by 0.1 percent and current account balance by 0.4 percent of GDP, which means the country has a lot at stake in what is currently going on in the Middle East. The implications for the new government are, therefore, obvious. (IPA Service)