The sharp rally in crude began in the middle of 2017 around $44/bbl and has rallied all the way to above $72/bbl. It may be recollected that the sharp fall in crude oil price since mid-2014 was triggered by a major spurt in production of US Shale. Is it really likely that Brent crude could touch $100/bbl in the next 1 year?
Don’t rule out Crude getting back to the $100/bbl levels
There are 4 principal reasons why a level of $100/bbl for Brent Crude is possible. Here is why:
- Effective January 2017, a consortium of OPEC, Russia and Mexico have agreed to cut crude oil output by 1.80 million/bpd. Interestingly, most of the major signatories to this agreement have adhered to these quotas, which explains the rise in crude prices.
- Political unrest in major oil producing OPEC members such as Libya and Venezuela has also contributed to the pressure on oil supply. With Venezuela elections coming up, the economic crisis could keep oil supply restrained.
- With the global growth revival in the US, EU and Japan, oil demand is expected to grow by 1.6 million bpd for the calendar year 2018. With US shale output likely to grow by just 1.1 million bpd, 2018 may again be a year of oil deficit to the tune of 750,000 bpd.
- It needs to be remembered that the US could consistently expand its shale production between 2012 and 2014 due to cheap funding options. With the Fed having hiked rates by 150bps since Jan 2016 and a hawkish outlook, cheap funding options are out!
Chart Source: Bloomberg
Crude oil at $100/bbl and the India story
What could crude at $100/bbl mean for India? Obviously, it will be inflationary considering the downstream effects of crude oil. Broadly, there will be 4 implications for India.
- It will create a policy dilemma for the government
- Trade deficit could get out of bounds
Data Source: Ministry of Commerce
There are a couple of worries here. If oil touches $100/bbl, then the average monthly trade deficit could cross $16 billion. That means we may end fiscal 2018-19 with a total trade deficit in excess of $200 billion. India’s import bill for 2017-18 is already in excess of $500 billion with the forex chest covering just about 11-months of imports. If oil touches $100, this forex chest cover could reduce much lower.
- Widening current account deficit will be a risk for ratings
- Crude oil could hold the key to higher CPI inflation
India has reaped the dividends of cheap oil for the past 4 years. A sharp spike in prices to $100/bbl could have long term implications for India.