The rise in oil prices, which have exceeded $92 per barrel, has serious repercussions on India’s economy, which imports 85% of its needs from abroad.
Oil prices continued to reap gains during today’s trading, Wednesday, September 13, 2023, recording the highest level in 10 months, and Brent crude futures contracts – November 2023 delivery – rose by 0.12%, reaching $92.17 per barrel.
US West Texas Intermediate crude futures – October 2023 delivery – also increased to $89.02 per barrel, according to what the specialized energy platform reviewed.
In this regard, the Care Edge Foundation analyzed (CareEdge) for the credit rating, the effects of the increasing pressures of global oil prices on India, the third largest importer and consumer of oil in the world, due to Saudi Arabia voluntarily reducing its production, as well as Russia.
India and high oil prices
In its report on the effects of rising crude oil prices on India’s macroeconomy, the Care Edge Foundation expects that the Asian country will continue to import oil shipments, as a result of high growth rates in the economy of the third largest oil consumer in the world.
The upward trend in India’s oil imports is also expected to continue over the coming years, despite price fluctuations.
In addition to meeting domestic consumption needs, oil imports have a huge impact on the huge capacity of refineries, which exceed 250 million tons annually, which qualifies India to become a net exporter of petroleum derivatives.
The report attributed the rise in crude oil prices to a number of geopolitical factors, most notably the Kingdom of Saudi Arabia’s announcement to extend the voluntary reduction in production (one million barrels per day) until the end of this year, and also Russia’s announcement to extend the reduction in exports until the end of 2023.
On September 5, 2023, Riyadh announced the extension of the voluntary reduction in oil production, by one million barrels per day, for an additional 3 months until the end of December of this year 2023, bringing Saudi oil production to the level of the coming months (October and November). November and December), about 9 million barrels per day.
This comes after Saudi Arabia approved in July 2023 an additional voluntary reduction of one million barrels per day, and the voluntary reduction in oil production approved by 9 countries in the OPEC+ alliance in April 2023, including the Kingdom, and began to be implemented in May 2023.
Russia also announced a reduction in its exports by 300,000 barrels per day until the end of December 2023, to support Urals crude prices.
The following chart – prepared by the specialized energy platform – shows India’s oil imports until July 2023:
Russian oil to India
India’s imports of Russian oil have witnessed a noticeable increase, supported by attractive discounts approved by Moscow to market its oil after Western sanctions following Russia’s invasion of Ukraine in February 2022.
India emerged as the largest buyer of Russian oil last year (2022), and the volume of its imports multiplied 22 times, and discounts on oil prices opened New Delhi’s appetite for buying, even though it was less attractive before the invasion.
Recently, India’s imports of Russian oil declined, due to the decline in the size of discounts compared to international prices.
The G7 industrial group imposed a price ceiling on Russian oil exports at the end of last year (2022), as part of a sanctions package to dry up the sources of Moscow’s war on Ukraine, which began last February 2022.
Although India does not adhere to the price ceiling in order to gain from price differences, the scope of these discounts has shrunk compared to before.
The spread between the price of Brent crude and Russian Urals crude fell to $14 per barrel in September 2023, compared to $28 in January 2023.
The price of Urals crude exceeded $75 per barrel, above the price ceiling levels approved by the West.
As prices rose and the value of rebates decreased, Russia’s share in India’s oil imports fell to 34% in August 2023 from 43% in April 2023.
The chart below – prepared by the specialized energy platform – shows India’s presence on the list of major importers of Russian oil after Western sanctions:
Oil market forecast 2023
CareEdge credit rating agency expects demand for oil to decline globally in light of the decline in supply, the economic slowdown in China, and weak consumer spending after the Corona pandemic.
Despite the current rise in prices, the report cited previous events in which the price of oil rose above $90 per barrel, saying that it will not last for long periods unless massive market disruptions occur.
It is possible – according to the report – that production cuts among countries in the Organization of the Petroleum Exporting Countries (OPEC) will lead to an imbalance between supply and demand during the third and fourth quarter of 2023.
Starting next 2024, slowing consumption is expected to offset the gap between supply and demand, leading to increased inventories and a potential decline in pressures leading to higher crude oil prices.
Effects of oil market fluctuations in India
Oil prices have huge consequences for India’s economy, due to its almost total dependence on imports from abroad.
Therefore, the report expects that rising global crude prices will increase inflationary pressures at home, but the government and oil marketing companies may absorb some shocks to mitigate the effects on retail fuel prices.
The increase in prices is also expected to have potential consequences on the current account deficit, with an increase of about 20 basis points expected if oil prices remain high.
On the other hand, the report says that the risks of slippage are limited, because oil marketing companies will bear the brunt of the increase in global prices.
Slippage here means the difference between the expected price and the real price of oil transactions.
In the face of this, the report advises the government to carefully monitor and take financial measures, which would help mitigate potential impacts.
He also expected that the flexibility of the Indian economy, in addition to the government’s intervention, would contribute to confronting oil price fluctuations.
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2023-09-13 17:37:25
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