Oil prices edge up on Venezuela, Iran supply worries

Henrietta Strickland
May 22, 2018

Oil prices will continue strengthening towards $80 (Dh293.84) per barrel due to geopolitical uncertainties in the market, but rising United States production is expected to counter efforts by the Organisation of the Petroleum Exporting Countries (Opec) to curb production and keep the market tight, experts said.

Investors are now questioning that hypothesis, pushing up forward prices. An analysis by this newspaper, more than a year ago, had indicated that nearly the entire reduction of about 0.6% of the gross domestic product (GDP) in India's fiscal deficit between FY14 and FY16 could be attributed to the sharp fall in crude prices. The top 15 importing countries (described in Chart 3) all managed to increase the volumes of their crude oil imports between 2013 and 2017, without any increases in the value of imports.

OPEC and its partners chose to extend its production cuts till the end of 2018 in Vienna on November 30, as the oil cartel and its allies step up their attempt to end a three-year supply glut that has savaged crude prices and the global energy industry. The two oil benchmarks are further apart than they have been since 2015, before US crude could be freely exported. However, if oil prices are pushed up by supply factors, it would be concerning. "The uncertainty on geopolitical issues is also contributing to the rally". Companies like Walmart Inc. have warned that higher fuel prices are starting to threaten margins. "This will send very positive price signals into the whole oil space with higher confidence, optimism and evaluations as a likely effect". The "Oil Price Dynamics" report published by the Federal Reserve Bank of NY finds that less than two-fifth of the rise in oil prices since the beginning of 2018 was on account of supply-side factors. Rising prices led to higher working capital, interest and operating cost.

It remains to be seen how far up oil prices will go, and what major political events could result in changes to supply or consumption. But inflation is great for gold and silver prices, which will more-or-less offset oil.

Yuan-denominated futures increased 0.6 per cent to 485.1 yuan a barrel on the Shanghai International Energy Exchange.

Our calculations, however, suggest that fuel subsidy could be as high as Rs54,000 crore if crude price averages $65/barrel in FY19.

Already, the oil price is having its impact on the currency market with rupee depreciating by about 7 per cent since January and current account deficit increasing every month.

Venezuela's woes have reached a point where the Organization of the Petroleum Exporting Countries (OPEC) - which has steadfastly downplayed any concern over the output losses of its once-mighty member - is now studying the matter to determine if relaxing its own output restrictions is warranted, sources familiar with the matter told Reuters.

In India, an increase in crude oil prices brings with it higher inflows from the Middle East.

"For the first time since December 2015, the back end of the curve has been leading the complex higher", said Yasser Elguindi, a market strategist at Energy Aspects Ltd.in NY. Considering the general election next year, it is hard to envisage a significant hike in retail fuel prices, and thus, the direct impact on CPI inflation is likely to remain muted. Petrol and diesel prices have increased to all time high levels in the absence of any government support.

Nikhil Gupta is chief economist at Motilal Oswal Securities Ltd.

Other reports by Click Lancashire

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