Crude oil market has come under considerable pressure as demand concerns have come to the fore following the outbreak of Wuhan coronavirus in the world’s largest import market, China. Notwithstanding output cuts, the world market is already seen adequately supplied in the first half of the year as a result of which prices have been slipping from their recent highs.

And, now with parts of China being shut down and travel activity substantially reduced because of halting public life, demand for energy is coming down. Worse, the disease is reportedly spreading to other countries as well.

On Monday, Brent crude declined below the psychological $60 a barrel towards $58.50, a multi-month low. WTI followed suit at $52 a barrel.

Falling crude prices are seen putting huge pressure on the oil producers’ cartel OPEC+ which is reportedly considering an extension of the production cut agreement till the end of the year in order to neutralise the current price softness. The next OPEC meeting is scheduled in early-March where even additional output cuts could be considered.

Although the market is reacting, as of now, the economic effects, especially the energy demand effects of coronavirus, are unclear. How long the outbreak will last and how much of economic activity will be affected is still a matter of conjecture. If the epidemic is contained soon – say over next three months or so – there is strong likelihood of the market bouncing back.

The macro picture suggests that though subdued, global growth in 2020 will show an uptick which should augur well for many commodities including the energy market. Higher growth will support oil demand.

Reducing trade war tensions between the US and China following the Phase One agreement is also a positive factor. There is expectation a second agreement – a more significant one – may be struck in the second quarter. Geopolitical stresses – USA-Iran stand-off, for instance – also have the potential to rear their head in the course of the year. Market participants should watch out for early signals and take appropriate steps.

Simply put, on current reckoning, although the world crude oil market reasonably well supplied this quarter and the next, any rise in geopolitical tensions can lead to a spike in oil prices. At the same time, if growth concerns continue to haunt, the market will face a downside risk.

It is precisely in such uncertain times that a major importer of crude oil such as India should exercise utmost caution. We cannot get carried away by short-term price movements; but have a view for at least two quarters ahead for strategically planning the import programme.

The current price fall should be seen as fortuitous for India. It should make commercial sense to buy at every dip. If crude prices were to rise, it will put additional pressure on the already weak rupee and stoke inflation which is already beyond the RBI’s tolerance limits.

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

comment COMMENT NOW