It is a stark shock with many implications for the world and India. The surge in Brent oil to USD 105 a barrel for the first time since 2014, driven by the escalating Ukraine crisis, has raised fears of a disruption in the region’s critical energy exports with consequences for India.
The genesis of the crisis is Russia’s status as the world’s second largest oil producer, which mainly sells crude to European refineries and is Europe’s largest supplier of natural gas, supplying about 35% of its supply. Brent crude touched above $96 a barrel on Tuesday as fears mounted over supply disruptions amid ongoing oil shortages stemming from soaring global demand and weak OPEC production.
The threat of sanctions forcing Russia to supply less crude or natural gas would have significant implications for oil prices and the global economy. According to Hetal Gandhi, director of CRISIL Research, the conflict between Russia, the second crude oil exporter with 12% market share, and Ukraine is expected to push already high crude oil prices to their highest level in 8 years and prices could stay above $100 a barrel in the short to medium term, unless OPEC decides to significantly increase production.
“Over the past three months, OPEC members have missed their production targets, which has influenced prices. The result is a negative energy and trade deficit for India, since we import nearly 85% of our crude oil needs,” Gandhi said. “If crude hovers around the $100 a barrel mark, India’s import bill may jump around 15% in the coming months,” added Naveen Mathur, director of commodities and currencies, Anand Rathi Shares and Stock Brokers.
The price of oil could rise above $100 a barrel due to the combination of the Ukrainian crisis, the cold winter in the United States and a lack of investment in the supply of oil and gas in the world , estimates Navneet Damani, senior vice-president (commodities and currencies). research) of Motilal Oswal Financial Services. “Russia accounts for one in 10 barrels of oil consumed in the world, so it is a major player when it comes to determining the price of oil. An escalation due to the crisis will really hurt consumers at the pump. petrol,” Damani said. .
Crude oil-related products have a direct share of over 9% in the WPI basket. “Rising crude oil prices are also expected to increase the subsidy on LPG and kerosene, driving up the subsidy bill,” Damani added.
“For India, a rise in crude prices poses inflationary risks,” Mathur said, with implications for monetary policy going forward. Indian oil marketing companies can change the price of fuel sold at the pump every day to bring it in line with international tariffs. But they left the prices unchanged since November.
“Despite the sharp increase in crude oil prices, OMC is abstaining due to the elections, but once they are over, there could be a sharp increase in pump prices, between 10 and 15 rupees,” said Aditya Shah, Chief Investment Officer. of JST Investments. Rising global crude oil prices as a potential trigger for India’s financial instability was recently flagged at the meeting of the Financial Stability Development Council (FSDC). “It’s hard to say how crude prices will develop. At FSDC, when we were looking at challenges to financial stability, crude was one of the things,” Finance Minister Nirmala Sitharaman said.
“These are worrying international situations where we have actually expressed that we want a diplomatic solution to the situation developing in Ukraine. These are all headwinds,” the finance minister said.
India must be prepared for the volatility in the energy market,” agrees Aditya Shah as he spells out the multiple scenarios that could unfold. in the short term if the United States releases oil from strategic reserves.
“This does not bode positively for the Indian economy as a whole as it will increase the current account deficit due to a higher oil import bill. This in turn will push inflation into the Indian Economy and Global Economies Gaurav Moda, Partner and Energy Sector Leader, Ernst & Young India, points out that in the Indian oil market, crude basically translates to oil used for trucks and cars. Diesel accounts for about 50% of the oil market, gasoline 20%, and LPG, kerosene and aviation turbine fuel make up the remaining 25-30%.
Thus, a high import bill for Indian oil traders and its impact would be visible – from the oil point of view – individually and directly as well as through the movement of trucks that transport most of the goods across the country. This would drive up logistics costs and therefore commodity prices in the country,” Moda points out, adding that the magnitude of the impact would depend on how long it takes for the crisis to take hold.
Investors are also watching the Iranian nuclear talks closely amid signs of progress. A potential deal could add more than a million barrels of supply a day and help ease a tight global market. Hetal Gandhi offers a window of optimism. “Fortunately, India’s gas needs are locked into contracts with Qatar, whose supply is unlikely to be affected if the war does not boil over.
However, the impact of rising gasoline prices would be felt in India, as everywhere else. Global energy production and supply will be in a state of near-term flux and will impact import-dependent countries. to release him and how fast he could release the barrels is a question mark.