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Crude reality remains restricted to demand-supply, even as OPEC meets on December 6

3 December, 2018 6:55 AM
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In the upcoming meeting of OPEC on December 6, it is widely believed that Saudi Arabia may not cut its crude oil production by much, if at all

It is estimated that a $10 per barrel increase in crude oil prices increases the current account deficit of India by $15 billion, or around 0.50 percent of GDP. Rising crude oil prices have also a profuse knock-on effect on inflation and fiscal deficit. Therefore, it is no coincidence that rising crude oil prices dents the Indian rupee (INR) and pushes up bond yields. The correlations are sturdy enough to endure in the foreseeable future.

This is primarily because it is not just the price of crude oil but a robust year-on-year increase in crude oil consumption coupled with a depreciating rupee over the longer term that may lead to our crude oil import bill swelling by 7-8 percent annually, even if crude oil prices remain static. There is no escape from it unless India makes huge advancements in the area of electric or alternate energy vehicles over the next few years and arrests the rise in crude oil imports.

In the years to come, oil market players and followers alike will remember Jamal Khashoggi and how his unfortunate and untimely demise turned the tables on the crude oil market. The oil market remains adequately supplied despite US sanctions on Iran, thanks to a surge in US exports and Saudi Arabia's production being near an all-time high.

However, in the upcoming meeting of OPEC on December 6, it is widely believed that Saudi Arabia may not cut its crude oil production by much, if at all. This will obviously divide the OPEC and may estrange Russia within an already uncomfortable alliance, much to the delight of crude oil consumers like India.

Crude oil price move in the last 5 years have baffled most experts and I won't even try to climb that slippery slope. Though based upon volatility in production and prices in last three years it may appear that if OPEC cuts production by 0.50 -1.0 million barrels per day on December 6, we may then see Brent crude settling within $60-70 per barrel range by the year-end.

Production cuts of more than one million barrels per day can catapult Brent crude beyond $70 per barrel by the end of the year. No, production cuts won't be taken kindly by the oil bulls who may throw in the towel and we may witness the final capitulation in Brent towards $50 per barrel.

Crude oil like gold attracts observers and commentators alike who relish to wax eloquent at each major price move. However, like every other commodity, crude oil's fortunes shall be decided by the demand-supply equation, the only reality that matters at the end of the day. One of those days may be in the next week.


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