Rising crude oil price is an assertive risk for any country’s economy and its investors, as oil prices directly impacts the real income and spending of all the sectors of the economy. Higher crude price dents the growth, increases inflation and widens current account deficit of import oriented countries such as India. As per economic surveys by market agencies, every $10 increase in the oil price dents the economic growth by around 0.2%-0.3%. Similarly, higher oil prices increases wholesale price inflation (WPI) by 1.7% and distorts current account. Higher inflation leads to a tighter monetary regime with higher interest rates reducing the real returns. The investors in such scenario will have fewer savings and higher spending. Similarly, corporate funding cost will increase. The widening current account deficit will also weaken the national currency, shrinking the importing capacities of investors.
Impact of Iran Sanctions on Indian oil market
The recent sanctions over Iran will have repercussions in India. Since the visit of Iranian President to India in February, India is expected to double its crude imports to 396,000 barrels per day (bpd) in 2018-19 from 205,000 bpd in 2017-18 as per the Petroleum Planning and Analysis Cell (PPAC). Even as imports rise, the impact over import bill will not be much as both the nations have already instituted several measures including allowing Indian payment and investments in rupees and setting up new banking channels between them.
Private firms like Reliance, Essar, which are more exposed to Iranian crude will be more impacted. However, most Middle East producers are keen in stabilising prices and acquiring new Asian market. Thus, the market is expected to get more competitive in terms of heavy grade crude prices which are feed for most of the Indian private refiners. Private players in India also indulge in spot agreements rather than long term contracts minimizing the impact over their profitability.
Crude oil prices dipped to $77/bbl level following a buzz that Saudi Arabia and Russia will increase their capped production levels as Iran and Venezuela supplies decrease. Although the global stocks levels are currently near balanced levels, prices have spiked tremendously due to supply restriction. Saudi Arabia and Russia are discussing raising OPEC and non-OPEC oil output by around 1 million bpd and such an increase would bring compliance with agreed supply curbs down to 100 per cent from April's level of 152 per cent. OPEC & Russia’s meeting is due on June 22-23 when the final decision will be taken.
The author is a fundamental analyst at Karvy Comtrade Limited