Indian crude basket to average $87/bbl, OMCs to bear the brunt as oil surges 6% over Israel-Hamas war

Chaos broke out after some residents in Gaza were abandoning their homes on Friday to escape from the path of an Israeli onslaught, after Israel ordered more than a million people to leave the northern half of the territory within 24 hours, while militant group Hamas told the residents not to go.

Market experts and commodity analysts reckon that the crude oil market remains hyper-alert to any indication that the Israel-Hamas conflict is poised to expand into the oil producing region in the Middle East.

‘’Reports regarding Iran’s support for the Hamas attack have been denied by Iran but concern is focused on a broader Iran-Israeli conflict, which would, in turn lead to a dramatic escalation of conflict in the region, and a dramatic climb in oil prices,” said Quincy Krosby, Chief Global Strategist for LPL Financial, based in Charlotte, North Carolina, US.

Also Read: Global oil market sensitive to Israel-Hamas war; Russia ready to boost supplies to Saudi Arabia: Novak

Closing prices of Brent crude, MCX of the week:

Brent futures settled up $4.89, or 5.7 per cent, at $90.89 per barrel. US West Texas Intermediate (WTI) crude gained $4.78, or 5.8 per cent, to $87.69 a barrel. Both benchmarks posted their highest daily percentage gains since April. Brent also recorded a weekly gain of 7.5 per cent, its biggest such increase since February. WTI climbed 5.9 per cent for the week, according to news agency Reuters.

Back home, on the Multi Commodity Exchange (MCX), crude oil futures due for a October 19 expiry, settled 5.45 per cent higher at ₹7,272 per bbl, having swung between ₹6,962 and ₹7,278 per bbl during the session so far, against a previous close of ₹6,896 per barrel.

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What’s driving crude oil prices?

-The conflict in the Middle East has had little impact on global oil and gas supplies so far, and Israel is not a big producer. Investors and market observers, however, are assessing how it could escalate and what it might mean for supplies from nearby countries in the world’s top oil producing region.

-Also boosting prices was the US government’s decision of imposing the first sanctions on owners of tankers carrying Russian oil priced above the G7’s price cap of $60 a barrel, to close loopholes in the mechanism designed to punish Russia for its invasion of Ukraine. Russia is the world’s second-largest oil producer and a major exporter and the tighter US scrutiny of its shipments could limit the supply.

-The Organization of the Petroleum Exporting Countries (OPEC) maintained its forecast for growth in global oil demand at 2.25 million barrels per day (bpd) in 2024, compared with growth of 2.44 million bpd in 2023, citing signs of a resilient world economy so far this year and expected further demand gains in China, the world’s biggest oil importer.

-The International Energy Agency (IEA) lowered its oil demand growth forecast for 2024, suggesting harsh global economic conditions and progress on energy efficiency will weigh on consumption. The agency now sees 2024 demand growth at 880,000 bpd, compared with its previous forecast of 1 million bpd. 

How will rising international oil prices impact Indian crude basket?

India – a net importer of crude oil which fulfills as much as 85 per cent of its energy needs through imports, may see a heavier import bill if international crude oil prices keep rising throughout the year.

On a global scale, India currently stands as the world’s third-largest consumer of crude oil, and its import volumes are expected to remain elevated in the coming years, even in the face of global crude oil price volatility, according to CareEdge Ratings.

The average price of Indian basket crude oil was estimated to reach 9$7.67 per barrel in fiscal 2023-24. While Indian basket crude oil prices have fluctuated this fiscal, this figure significantly increased from the previous year’s average of $78.19, according to estimates given by brokerage firms.

Impact on OMCs: High international oil prices will raise the average Indian crude basket price and the oil marketing companies (OMCs) including Indian Oil, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL), will register losses in gross refinery margins.

Also Read: From high inflation to import bill – the domino effect of rising crude oil prices on Indian economy

 If the higher global crude price is transmitted to the retail market, it can increase domestic inflationary pressures and there would be pressure on OMCs not to hike retail petrol or diesel prices, according to analysts.

‘’As we approach the pre-election period, we anticipate that OMCs will absorb a significant portion of the elevated global crude prices. The government may also consider partially sharing this burden with OMCs by reducing certain duties and taxes on retail fuel prices,” said CareEdge Ratings.

However, the central government can force OMCs to cut petrol and diesel prices as their balance sheets have largely got repaired due to stronger profits in the current fiscal. Notably, domestic brokerage firm JM Financials expects the government to cut petrol and diesel prices around Diwali as state elections begin in November-December 2023.

Impact on CAD: According to latest estimates by market analysts, India’s current account deficit (CAD) -which measures the difference between exports and imports of goods and services – is also impacted by high crude prices.

CAD is a key indicator of the balance of payment of a country and in the current scenario of the momentum picked up by crude rates, every $10 dollar rise in Brent futures potentially widens the CAD by 0.5 per cent.

“Rising crude prices positively impact oil exporters and negatively impact oil importing countries like India. Every 10 dollar rise in Brent crude prices widens India’s current account deficit by 0.5 per cent. Consequently this depreciates the INR and leads to imported inflation,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The Indian crude oil basket has averaged ~ $80.1 per barrel in the first five months of FY24. But the price of the Indian crude basket touched $90.7 per barrel in the first week of September. 

‘’If Brent crude prices remain elevated at this level for the remainder of the fiscal year, we anticipate that the full-year average price for Indian crude oil basket could be ~$86-87 per barrel,” said CareEdge Ratings.

Assuming India imports ~ 5 million bpd of oil, the full-year current account deficit will likely increase by approximately 20 basis points (bps). Consequently, CAD may increase to 1.8 per cent of gross domestic product (GDP) if Indian crude basket averages ~$90 per barrel for the remainder of the year.

Overview

Oil majors Saudi Arabia and Russia announced this month that they will stick with the oil supply curbs of more than 1 million bpd to the end of the year. The production cuts first announced by the two OPEC leaders in July have driven up prices to 10-month high levels and posed fresh inflationary pressures for the global economy.

“Oil has a disproportionate impact on global financial markets due to its pivotal role in the world economy, its interconnectedness with various sectors, and its potential to influence broader economic conditions and investor sentiment,” said Nigel Green, CEO, deVere Group, an independent fintech company.

Today, OPEC nations produce around 30 per cent of the world’s crude oil. Saudi Arabia is the largest oil producer within the cartel, producing more than 10 million barrels a day. OPEC+ pumps around 40 per cent of the world’s crude and its policy decisions can have a major impact on oil prices.

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Updated: 14 Oct 2023, 05:59 PM IST