Even in the best of times, the global crude oil market is 90 per cent political and only 10 per cent economic. In recent days, crude oil prices have been on a roller-coaster ride with the market buffeted by a host of factors including geopolitical tensions, supply outages and demand concerns.

The US is still recovering from the after-effects of hurricane Ida with slow normalisation of crude oil production. Apparently there is a tug-of-war between opposing forces, which means the market participants are unable to decide where price should head.

Brent crude has climbed to $74.4 a barrel on Wednesday, its highest in six weeks, supported by supply outages in the Gulf of Mexico, which is seen tightening the market in the short term. WTI is not far behind.

Go long on MCX crude oil

For August, despite rising by 151,000 barrels per day (bpd), the OPEC oil output fell short of the 400,000-bpd target. No wonder, pressure is mounting on OPEC to unwind the output cuts. China has officially announced it plans to release crude oil from its state reserves to dampen prices, which the authorities see as high. Interestingly, India is selling oil from its strategic reserves, estimated at 300 million barrels.

The shortfall in global supplies was partly due to a sharp fall in Nigeria’s output, largely due to attacks on oil infrastructure in the country. At the same time, many OPEC members are still underproducing against their quota. All of this suggests that the group is struggling to return supply to the market as quickly as planned.

Crude oil production down 3.22% in July

Interestingly, OPEC revised up its 2022 forecast for global oil demand by 0.9 million barrels to 100.8 million bpd. In other words, more OPEC oil output will be needed to meet this extra demand.

So, slower-than-planned increase in supply and higher demand forecast will lead to more vociferous calls for a faster relaxation of OPEC output cut. Even ahead of the OPEC+ meeting on September 1, the Biden administration had called for more OPEC supply to stem rising gasoline prices in the US.

International Energy Agency (IEA) envisages significant undersupply of oil in the short term. IEA estimates a deficit of 450,000 bpd in the fourth quarter; but its revised forecast for global oil demand is an increase of 5.2 million bpd this year and 3.3 million bpd next year. So, IEA seems considerably more cautious than OPEC, which expects demand to be nearly one million bpd more next year.

All this means the downside risk to crude oil prices in the fourth quarter of this year is rather limited with financial investors still holding bullish bets. Prices are expected to stay firm till the year-end.

This is, of course, not good for India with import dependence exceeding 80 per cent. Indigenous crude oil production has been steadily declining for the last five years. From 36 million tonnes in 2016-17, output declined to 30.5 million tonnes in 2020-21, as per official data.

According to the government, to ensure energy security, 5.33 million tonnes of strategic crude oil reserve has been built through a special purpose vehicle named Indian Strategic Petroleum Reserves Limited. Taking advantage of the low crude oil prices in the international market, India purchased 16.71 million barrels in April-May 2020 and filled all the three strategic petroleum reserves created at Vishakhapatnam, Mangalore and Padur. The stored crude is released only in case of global supply disruptions.

(The author is a policy commentator and commodities market specialist. Views are personal)

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