Even as Israel on Monday declared a “complete siege” on Gaza and launched hundreds of strikes on the Palestinian enclave, Brent crude prices were up almost 4% on Monday, bucking the recent trend of consolidation.
Prices of Brent on the Intercontinental Exchange rose to $87.78/bbl and that of West Texas Intermediate on the New York Mercantile Exchange was at $86.04/bbl. The intra-day spikes were even sharper – by up to 5.1% for West Texas Intermediate.
The price spike for the crucial energy source for which India relies heavily on imports has prompted the government to pledge that it would watch the situation closely and “handle it with maturity.”
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On the sidelines of an event, Hardeep Singh Puri, minister for petroleum and natural gas, said, “So far, as energy is concerned, let us be absolutely clear that the base where the action is taking place is in many respects the centre of the global energy. So, the state will watch (it) very carefully.”
Any sharp rise in crude prices has serious fiscal and macro-economic implications for India. Crude oil prices above the level of $100 per barrel “will not work (for India)”, Puri said. “If crude oil prices crosses a threshold, it feeds the inflationary pressure,” the minister noted.
“Whenever there is any geopolitical disruption, a speculative risk premium gets added to the prices,” said an analyst who did not wish to be identified.
However, Puri believes that any geopolitical turbulence, such as the Israel-Hamas conflict, paves way for sustainable and cleaner alternatives to crude oil. “These kinds of uncertainties only encourage people to move into sustainable, cleaner fuels and I cited the biofuels alliance as an example,” Puri said.
On the other hand, analysts believe that if the war escalates, crude prices can further rise and reach beyond the range of $80-95/bbl on the back of global supply cuts and added risk premiums due to the war.
“Crude prices have been projected at $80-95 per barrel in the second half of the current financial year considering that the global economy and demand for oil is not great,” said Prashant Vashisht, vice president, ICRA Ratings. However, if the Israel conflict spreads and Iran gets involved, or there is an impact on broader regions, the prices can even go beyond the range, he said. West Asia produces one-third of the global oil supply.
India is the third-largest importer of crude oil and fulfills around 80% of its total requirement through imports.
“Actual oil supply from the Gulf is unlikely to be affected from this as of now. But if there is a broader extension of this conflict affecting major producers like Saudi, Iraq, etc, (rebels targeting oil installations there & worsening of relations between them and west) and trade flows (like Suez though that’s deep in Egypt territory), then oil prices could spike,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
Last week, India had urged OPEC to maintain balance and affordability in the oil markets after the prices reached the level of $97 per barrel in September after Saudi Arabia and Russia announced to extend their production cuts till the year end. These cuts are in addition to the output cut announced by OPEC.
While the cartel has the right to decide how much they want to sell in the market, they should make sure that the prices do not cross a “threshold”, Puri said.
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“The amount of crude oil that is required to sustain the current levels of consumption is available,” Puri said. “But if some 5 million barrels a day has been taken off the market that is the issue,” the minister said.
Global oil inventories are at lower levels and the extension of production cuts by Saudi Arabia and Russia are likely to result in a tighter supply as the winter season approaches.
According to data from the Energy Information Administration, crude oil inventories in the US, one of the top producers of crude, fell by 2.2 million barrels to 414.1 million barrels recently.
