CRUDE OIL – THE SNAKE IN INDIA’s PARADISE

By Ruma Dubey

The snake in India’s paradise is now crude oil. After having favored the Modi Govt all along by staying buried around $30-40/barrel, all of a sudden, it has now raised its ugly hood, its fangs out, threatening to sink into India’s neck.

Yes, crude oil is a worry today and could become fatal soon. All our talk about inflation could come to a naught if this one commodity continues to rise. A rising crude oil has the potential to even reverse our lowering interest cycle – that is how deadly the venom of this ‘crude’ snake is.

Yesterday, crude oil hit a 28-month high. Oil prices have climbed by $15 from their nadir this year to breach $57/barrel. This was mainly on account of the happenings in Saudi Arabia.

In what is seen as a way to secure his position as King, Mohammed bin Salman (known as MBS), Crown Prince and heir to King Salman used his recently power as head of the anti-corruption committee (set up by him) to arrest or detain eleven former ministers and dozens of Saudi princes, all on charges of corruption, graft or financial malfeasance. How does this affect the crude oil price? Firstly, Saudi is the de facto leader of OPEC. This move of the Crown Prince has created a sense of political instability – many say this move to bring some of the powerful was MBS’s way of staving off challenges and opposition from some of the powerful figures in Saudi. This sense of uncertainty has created this bull trend.

Secondly, the OPEC is scheduled to meet on the 30^th of Nov in Vienna. MBS has time and again stated that he is in favor of extending production cuts unlike the predecessors in Saudi. Thus this shift in policy could underline the meeting of OPEC; this alone is reason enough to keep the prices buoyant till end of the month.

Another reason is that Salman has been vocal about his intention to sell stake in Saudi Aramco, the state oil company and quite possibly the world’s most valuable company. An IPO might be on the anvil and for the IPO to become successful, a higher crude price is essential.

Having said all this, there is also the probability that what we are seeing today is a short term bull run, merely fueled by MBS vexing his power muscles and anticipation over OPEC meet. There is also the possibility that other OPEC members, encouraged by the current price rise, could up their production.  OPEC members are not exactly renowned for keeping their word- they have cheated in the past and there is no telling that they will not comply over production cuts as oil rises to over $60. Thus there is a very real chance of greed and non-compliance leading to another bout of over-production, which will once again send the prices down.  

It’s now all upto the Saudi prince to convince the members to comply and not get lured by the current bull run and up production or else, they could be once again staring hard at $40 for more time to come.

The big question really is how a rising crude oil price impacts India. The oil market pundits say that $70 would become really tough and beyond that, could be crushing. The main reason being that India has fully deregulated petrol prices; today the price of fuel changes every day, moving in tandem with the international crude price. In 2014, this deregulation made perfect sense as oil had slumped from over $100/barrel to $50 and we could take full benefit of the falling oil prices. But now, with the trend reversed, the fuel prices are going up. This directly impacts every single pocket – right from the fuel you fill up your car with to the fuel used in factories to make goods and fuel used to transport goods/people. Crude oil has a direct relationship in our day-to-day life and any sharp rise, will most certainly leave a telling impact. The simple fact is – if oil continues its march towards $70, the Govt might have to step in and once again announce subsidies.

For now, we all can only wait and watch, see what happens at the OPEC meet on the 30^th. Till then, your travel travails of every day are sure to pinch the pocket.