How will OPEC cutting oil supply by 2 million bpd impact India

OPEC cutting oil supply by 2 million bpd
OPEC cutting oil supply by 2 million bpd

Indian Market
by 5paisa Research Team Last Updated: 2022-10-06T16:10:27+05:30

It is now official. The OPEC Plus alliance is cutting oil supply by 2 million barrels per day (bpd) from the month of November. Obviously, that is going to wipe out a lot of supply in the market and make the demand supply situation tighter. Clearly, Russia (which is part of OPEC Plus) has prevailed upon the OPEC members to reduce supply. The intent is that the supply cuts of 2 million bpd takes effect before the EU price caps on Russian oil takes effect. That may force the EU to reconsider its decision to put price caps on Russia since that would become impossible if the supply situation is too tight.

That is likely to have a global blowout effect. Firstly, the US could see fuel inflation going up again, pushing hawkishness of the Fed back on the table. Europe is already facing an energy crisis and higher energy prices will only make the situation worse. They may have to even reconsider their stance on Russia. But the real impact would be on net importers of crude oil like India. For instance, India relies on crude imports to meet 85% of its daily crude oil needs. That makes the Indian economy overtly vulnerable to any spike in oil prices. However, whether a price hike and an economic slowdown can co-exist is the real question.

OPEC has presented the decision as a means to adjust the supply to the demand. OPEC has been talking about substantial demand destruction due to the expected recession and they only expect it to get worse in the coming months. Due to the uncertainty that surrounds the global economic and oil market outlook, OPEC had decided to reduce the supply at a fairly crucial juncture. Brent Crude has come down from $135/bbl to $85/bbl. While balancing supply and demand is the ostensible reason, the real reason appears to be to ensure that Brent crude stays in the range of $90 to $100/bbl even amidst risks of a slowdown. 

One more interesting statement that came from the OPEC Plus alliance was that the cooperation between the OPEC cartel and supplementary members like Russia and Mexico would extend their cooperation for much longer. That deal was likely to expire in December but that looks more like a permanent arrangement. Today, oil is like a vicious cycle. Higher oil prices would translate into higher inflation and that would in turn translate into more rate hikes. If that transforms into an economic slowdown, then supply and demand become a self-adjusting process. That is the kind of cycle that is a risk for India.

But the whole game now looks to be played to pre-empt the EU ban on Russian oil and gas imports. Had it not been for this OPEC supply cut, the Russian ban was to take effect from December this year. With supply already down by 2 million bpd, EU countries will now have to think twice before putting price caps and import bans. Of course, Russia could have refused to ship oil to countries that impose a price cap on Russia, but that would have gotten too ugly. Instead, by cutting the OPEC supplies well in advance, the Russian government has got the first mover advantage. We need to see how EU reacts now.

For India, the problems are manifold. The robust refining industry in India is still largely dependent on global crude supplies. India is likely to see a slew of state elections followed by general elections in 2024. The government would not want to have a situation wherein the price of petrol and diesel go through the roof. It would be too politically and socially sensitive in the Indian context. In the last 2 meetings, OPEC has cut supply by nearly 3 million bpd. Clearly, oil is going to be slippery in the coming months. The only hope for India is that too much hawkishness creates a slowdown and automatically tempers oil prices.

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