Oil prices rose by ~8% after Saudi Arabia led OPEC+ announced a surprise oil production cut on April 2, 2023. Voluntary production cuts by OPEC+ members amount to a total of 1.6 mbpd (million barrels per day), almost 2% of global oil demand. 

Oil prices spiked in 2022 in the aftermath of global economic recovery after the COVID pandemic and Russia-Ukraine war, touching $120 a barrel. Subsequently, high inflation across economies led central banks to hike rates aggressively, eventually leading to concerns over slowdown in global economy. The restart of Chinese economy in December 2022 too, could provide limited support to oil prices. March 2023 brought a new concern over global economic recovery with the collapse of SVB in the U.S. and ensuing banking stress. In Europe, Credit Suisse went in for a forced merger with UBS orchestrated by the Swiss authorities.

In 2023, brent crude price fell from its high of $88.2/bbl in January to $72.8/bbl in March. The current production cut by OPEC+ is in the light of concerns over global growth and weak oil demand. Moreover, Saudi Arabia isn’t too happy about the fact that the U.S. will replenish its reduced strategic reserves slowly over time. Major oil exporting nations (OPEC+) suffered a huge deal of loss in their oil export revenues as U.S. shale oil flooded the market and drove down prices in the previous decade. Moreover, the COVID pandemic reduced global oil demand by ~10%. While the OPEC+ nations have been following strategies to diversify their economies away from oil in recent years, currently oil still plays a major role. OPEC+ has been able to gain its pricing power back after almost a decade as Russian oil remains under sanctions, and U.S. shale seems to have peaked out. Investors in U.S. shale over the last few years have focused on returns and financial discipline as opposed to mindlessly increasing output.

The International Energy Agency (IEA) in March 2023 had projected global oil demand to grow by 2mbpd in 2023. This implied a deficit ranging 1-1.5 mbpd in the second half of this year before OPEC+’s new cuts. The actual deficit could now be more than this, provided the global economy stays on track. The IMF will release its updated economic outlook on April 5, 2023. In all likelihood, global growth outlook will be revised downwards from January 2023 estimates after factoring in the impact of recent banking crisis in Europe and the U.S.

Analysts are now looking at brent crude prices close to $100/bbl in the second half of CY’23. While the possibility of $100/bbl oil cannot be ruled out, a sudden and sharp increase seems unlikely given the fact that concerns over weak global growth dominate market sentiments. What could lead to a spike? Better than anticipated recovery in China, and an escalation in geo-political tensions.

India imports ~5mbpd of crude. A $10 increase in price of crude oil can inflate India’s merchandise import bill by 4-5%. However, in recent months India has been importing major quantities of Russian crude oil, which is available at a 30% discount to international benchmarks. An increase in the price of crude oil impacts inflation via an increase in retail prices of petrol and diesel. However, retail price of petrol and diesel have remained unchanged since May-2022. A hike in retail prices in line with an increase in crude oil prices seems unlikely given the general elections in CY’24 and focus to bring down inflation. An increase would be absorbed by the Oil and Marketing Companies. Hence the impact of this recent increase in global crude oil prices on India is likely to be limited.