Despite the decision of OPEC and its allies to gradually increase production in the coming months, crude oil prices have ruled firm above $60 a barrel. On Tuesday, Brent climbed to $63.8, while WTI breached $60 a barrel.

Brent had briefly touched $70 a barrel in March. Demand concerns, especially in Europe, combined with high supply prospects on account of OPEC+ decision surely played a part in the price correction.

US supplies

On current reckoning, the oil market outlook is ominous. While demand will continue to recover as economic activities gather pace around the world under the lead of China followed by the US, supply is expected to remain constrained over the next two quarters. This is sure to encourage speculative capital to flow into the market and exert an exaggerated impact.

In the US, the weak pace of drilling activity suggests that production will be slow to recover. From the peak level of 13 million barrels a day (mbd) in 2019, the US output currently stands at less than eight mbd. Producers are looking at sustainable production rather than explosive growth in output. If current price levels hold in the months ahead, production is sure to accelerate further.

What’s more, any hope of supplies from Iran resuming anytime soon now stand dashed because the negotiations between the US and Iran on nuclear dispute are not making much headway. Sanctions are still in place. Yet, Iran continues to supply oil to China at the rate of one mbd.

Admittedly, Iran could be one single factor that can significantly add to the global supplies and thwart any major upward movement in oil prices.

Asian imports

At the same time, imports into Asia – mainly China and India – are rising. Chinese import data show that the Asian major imported 49.7 million tons of crude oil in March which is over 10 percent more than February import and up 21 percent year-on-year. In the first quarter this year, China’s imports surged by 9.4 percent year-on-year. On a daily basis, China’s imports are an estimated 11.7 mbd.

Looking ahead, it is clear, the emerging global supply-demand fundamentals point to a small deficit in 2021, with the assumption that Iran will not enter the market. With investor interest in oil remaining constructive, it should be no surprise if Brent trades between $65 and $70 a barrel this quarter.

This is not good news for a major importer like India. While our appetite for consumption of energy products is ravenous, higher oil prices are sure to fan inflationary tendencies as oil is a universal intermediate. Worse, the Rupee has fallen below 75 to a dollar and more weakness is expected. A depreciated rupee will raise the landed cost of crude oil. New Delhi would be well advised to take cognizance of the emerging situation.

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

Related Topics