Despite the fact that both Brent ($67 a barrel) and WTI ($58) gained about 5 per cent last week, crude oil is still buffeted by what many think are near-term bullish and medium-term bearish factors. The market is currently groping for a clear direction even as signals seem elusive.

In addition to agreed production cut by OPEC+ and involuntary outages in Iran, Venezuela and Russia (persisting contamination problem), tropical storm Barry in the US too took its toll by paralysing oil production in the Gulf of Mexico. The market took cognizance of the likely decline in the US stocks in the days/weeks ahead, worsening the ongoing fall of recent weeks.

OPEC output cuts

While OPEC has made its position clear about continuing with the agreed output cuts till March 2020, other market-moving factors will come into play sooner rather than later.

Demand concerns are surely coming to the fore. China’s overall June import data are far from flattering, although oil imports have remained strong. Oil imports of the Asian major are likely to slow in the coming months. The US too is widely expected to lose growth momentum in the months ahead as the positive effects of stimulus fade. In other geographies too demand growth is expected to take a hit going forward.

Glut expected

Interestingly, both OPEC and International Energy Agency expect that the oil market may be oversupplied early next year as output from the US as well as non-OPEC producers is rising. Global stocks are set to rise because of a combination of rising production and slowing demand growth.

That should reduce pressure on OPEC oil which in turn should bring us to the next big question whether OPEC+ will deepen the production cuts. Although not impossible, on current reckoning, such an eventuality appears improbable.

A known unknown for the market is how the relationship between the US and Iran will pan out in the months ahead. There are some very incipient hopeful signs of a thaw, but it would be speculative to take a call on that. However, if the relationship were to worsen in the form of military action, the picture would change dramatically.

Imponderables for India

It is under such unpredictable market conditions that India as a large importer has to operate. Our dependence on imported crude oil has been worsening over time and currently stands at close to 80 per cent. If global prices were to rise higher for whatever reason, all the economic and growth projections of the government will go for a toss. It is critical to recognise that the largely benign inflation situation faces a risk because of the potential for the crude oil market to rise.

That should be seen in tandem with lagging monsoon precipitation in large parts of the country which in turn may shrink the size of Kharif crops. A weaker rupee can further skewer the economic outlook. Are we ready with risk mitigation strategies?

The writer is a policy commentator and commodities market specialist

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