InvestorQ : What does the big oil supply cut by OPEC really mean for Indian markets?
Ria Jain made post

What does the big oil supply cut by OPEC really mean for Indian markets?

Dia Deshpande answered.
1 month ago

The final announcement from OPEC was almost double of what they had originally suggested. After cutting supply by 1 million barrels per day (bpd) in the last meeting, the October meeting was to cut supply by another 1 million bpd. However, the OPEC ended up cutting the supply in October by 2 million bpd, taking the total supply cut over the last 2 OPEC meetings to 3 million bpd. That could potentially wipe out a lot of supply from the market and make the demand supply situation extremely tight for India. This higher supply cut appears to largely be an outcome of Russian pressure on the OPEC.

Now Russia is not a part of the OPEC but it is part of the OPEC Plus, an informal alliance of big oil producers. The OPEC Plus also includes non-OPEC countries like Russia, Mexico and Kazakhstan. The OPEC Plus was conceived to form a more comprehensive oil alliance and take on the might of the US which had started flooding the global markets with oil from 2014 onwards. The idea was that the supply cuts of 2 million bpd take effect before the EU sanctions on Russian oil takes effect. That will force EU to reconsider its decision to impose price caps on Russia since that will not work if the supply situation is too tight.

The impact would be felt the most by net importers of crude oil like India. For instance, India is dependent on crude imports to meet 85% of its daily crude oil needs. That is because, India has a solid refining franchise but hardly produces any oil worth noting. That has made the Indian economy largely vulnerable to spikes in oil prices. Whether a price hike and an economic slowdown can co-exist is the real question. In fact, that is the biggest question because, now the biggest hope for India is that the recession fears would depress demand and nearly offset the supply cuts announced. That would hold prices lower.

Even as the OPEC Plus has pledged to persist with the alliance well beyond December, India’s problems would multiply. India is up against a string of state elections followed by general elections in 2024. The government would hate a situation where petrol and diesel prices are shooting up as that would be too politically and socially sensitive. Clearly, oil is going to be slippery territory for India in the coming months and the rupee at 82/$ could only worsen matters for India. For now, India can be hopeful about one thing that the global slowdown due to high interest would automatically curtail fuel prices.