Commodities

Brent may trade around $75 a barrel in Q3

G Chandrashekhar | Updated on June 04, 2021

Thanks to improvement in demand conditions and remarkable discipline displayed by OPEC+ in maintaining production levels

Brent crude has broken above the psychological $70 a barrel for the first time since May 2019 thanks to improvement in demand conditions and remarkable discipline displayed by OPEC+ in maintaining production levels largely as agreed. In particular, Russia has shown exemplary restraint in abiding by agreed production cut.

The price rally should have encouraged the non-OPEC producers; but their muted response so far seems to embolden OPEC+. Iran too seems to bide its time and is being accused of non-cooperation in providing information relating to the nuclear dispute. In other words, Iran is not going to return to the world oil market in a hurry.

Finding a mismatch between supply and demand, financial investors have turned bullish on the crude market. There is speculative buying interest which by its very nature exerts an exaggerated impact on prices.

OPEC+ has now decided to raise oil production in July by as much as 8,41,000 barrels a day. This means, from next month, OPEC+ would have expanded the output by over two million barrels per day since May.

According to estimates, inventories in OECD countries (a group of developed nations) are expected to decline by the end of July to below the five-year average. Demand in USA and Europe is expanding with gradual easing of lockdown restrictions. As the market is currently tightly supplied, a hike in output is unlikely to put downward pressure on prices which itself is a confidence booster for producers.

The group has decided to hold production as of July 2021 till April 2022. However, any further price escalation is sure to bring howls of protest from consuming countries dependent on imports. India is one of them – world’s third largest consumer of crude oil with an import dependence of an alarming 80 percent.

So, depending on price performance, it is possible OPEC+ might decide in the coming months to raise the output in a calibrated manner that would generate revenue for the producer but at the same time not unconscionably hurt consumers.

On current reckoning, Brent is likely to trade between $70 and 75 a barrel in the third quarter. This is not a price India will be comfortable with. These price levels are sure to fan inflationary tendencies.

Crude oil imports into the country in the last three months have slowed down because of the second wave of Covid-19 infections that have forced regional or localized lockdowns. There is some demand destruction. If the rupee were to depreciate from the current levels, it will put additional cost burden.

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

Published on June 03, 2021

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