What is the quantum of crude oil output cut announced by OPEC+ countries last weekend? What is the total cut in output per day now?

Facing sluggish demand, Saudi Arabia will effect a voluntary reduction of 500,000 barrels per day (bpd), Iraq 211,000 bpd, United Arab Emirates 144,000 bpd, Kuwait 128,000 bpd, Algeria 48,000 bpd, Oman 40,000 bpd, Kazakhstan 78,000 bpd, and Gabon 8,000 bpd.

The production cuts by OPEC countries, which account for one-third of the global oil production, will begin in May 2023 and last for the entire calendar year. Total cut is around 1.16 million bpd. That apart, Russia has also announced a voluntary adjustment of 500,000 bpd to last until end-2023.

Why was the cut in output announced? Is the current daily output enough to meet daily demand?

OPEC has said the cuts are a precautionary measure aimed at supporting the stability of oil markets. Analysts said the cuts are intended to mitigate the impact of a sluggish global economy and the banking crisis in the US on crude oil prices. These had weakened crude oil prices significantly ($67-68/barrel). Following the announcement of the cuts, crude oil prices are now at December 2021-January 2022 levels ($85 per barrel). Crude had hit $139 per barrel in March 2022.

Analysts say right now there is no issue of supplies. Global crude oil production averaged at 100 million bpd in 2022 and is expected to hit 101.5-102 million bpd in 2023, while oil supply stood at 101.5 million bpd in February 2023. Global refinery throughput is at around 81.5 million bpd.

As per the March oil market report of the International Energy Agency (IEA), a 52.9 million barrel surge in global inventories in January 2023 lifted known stocks to nearly 7.8 billion barrels, their highest level since September 2021 and preliminary indicators for February 2023 suggest further build-up. Despite solid Asian demand growth, the market has been in surplus for three straight quarters.

What will be the impact of this cut on crude oil prices? What are analysts predicting?

On Monday, after the crude oil exporting cartel announced production cuts, the global benchmark Brent rose by more than 5 per cent to hit $84.13 per barrel, one of the sharpest price rises in the past 10-11 months. For comparison, after the Silicon Valley Bank crash in the US (March), crude oil prices fell as low as $67 a barrel. Analysts predict a crude oil price of $95-100 per barrel by December 2023 and Q1 2024.

Analysts have warned that the cuts would impact prices thereby further exacerbating inflationary pressures on the global economy. For India, this would mean higher oil import bills and this could stoke inflation if the government resumes the daily retail auto fuel price revision mechanism. If the government continues to freeze retail prices, then the oil marketing companies will again witness huge under recoveries.

How does this cut and increase in crude oil price impact the rupee and the current account deficit? 

 Cut in production has started impacting crude oil prices within a day of the announcement — Brent prices went up by $5 a barrel. Since India imports more than three-fourths of its crude requirement, higher prices will push the import bill, which means more demand for the dollar and that will widen the current account deficit and weaken the rupee. Dhruv Sharma, Senior Economist with World Bank, says: “An increase of $10 a barrel could translate into 40 basis points to half a per cent increase in CAD.”  

Will the RBI have to modify its monetary policy in line with rising crude oil prices? 

Till the announcement of crude oil production, it was widely expected that the Monetary Policy Committee (MPC) is likely to end the rate hike cycle in April with 25 basis points rise, and then it might go for long pause. Also, it was believed that MPC might vote for ‘neutral’ stance. Now, the apprehension is that if crude prices continue going northward, then prices of petrol and diesel could go up as governments (Central and States) have limited room available for duty cut. Now, unseasonal rain is posing a new risk to food inflation, and fuel price rise might further food as well as headline inflation. Considering these, rate pause, after a possible 25 bps hike in April review, could be temporary.