In what is sarcastically described as White House volatility, the under-supplied global crude oil market has received another shock in the form of US President Trump’s decision not to extend the exemption granted to eight countries, including India, to buy oil from Iran.

The announcement has jolted the energy market at a time when crude rates have persisted at higher levels much to the discomfiture of import-dependent economies such as India. A voluntary production cut by OPEC+ and involuntary drop in supplies from Venezuela has already tightened the market.

No doubt, there was some hope — even if remote — of a continuance of the waiver; but it is now belied. With Washington taking a hard stand against Tehran, the market has to brace for higher prices as supplies from Iran (estimated at 1.3 million barrels per day) will drop precipitously from next month over and above already curtailed supplies from other origins.

The market has promptly reacted to the bullish development. Brent touched $74.5 a barrel on Tuesday, its highest level in six months, and is set for a further rise. Speculative capital is rapidly moving in as bullish bets on crude rise. As of now, $80 is in striking distance.

While President Trump is counting on OPEC to stabilise global oil supplies by pumping more to neutralise the potential loss of supplies from Iran, it is unclear as yet if they would oblige. OPEC is scheduled to meet in June. At the same time, shale producers in the US are sure to ramp up production to take advantage of rising prices.

Cloud over output pact

Even as the oil market is on the boil at the moment, it is not unthinkable that the agreement to cut production by OPEC and allies (mainly Russia) may come apart in the coming days. It is known that Russia is not happy with the output cut and certainly not keen to extend the cut. Some others may also follow suit. Venezuela is reportedly moving oil through a Russian company and is able to skirt US sanctions.

In this uncertain situation, China remains an enigmatic factor. The Asian major purchases significant volumes of oil from Iran to meet its ravenous appetite. Whether China will buckle under Washington’s pressure or defy the US is a multi-million dollar question. Importantly, if China were to defy the US, will the latter dare impose sanctions on China? Ironically, trade talks between the two countries — the world’s largest economies — are currently underway to negotiate a deal following imposition of tariffs and counter-tariffs on a range of commodities.

The oil market tremor from soaring prices is sure to hurt India, whose import dependence is scary at over 80 per cent of its consumption needs. Coming at a time when the country is in the midst of general elections and formation of the next government is at least a month away, escalating crude oil prices are sure to pose a daunting challenge for the new government to grapple with.

Rising crude will further accentuate the trade deficit, negate the gains the rupee made in recent times and disturb the largely benign inflation situation.

While supply disruptions are in focus at the moment, demand concerns will take over in the months ahead. With an imminent slowdown of the world economy driven by EU, Japan, China and US, the second half of 2019 may see demand compression, exit of speculative longs and a sharp correction towards $60 a barrel.

The writer is a policy commentator and commodities market specialist. Views are personal

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