World oil price outlook: No freeze on output, low prices good for India

World oil price outlook: No freeze on output, low prices good for India

For India, the overall outlook in a low price regime is positive.

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(Source: PTI)

By Saurabh Chandra

On September 5, 2016, Brent Crude Oil prices jumped by as much as 5 per cent in the wake of a news item that Russia and Saudi Arabia had set up a working group to monitor the market and come up with ways to stabilize the crude market.

Reality soon sunk in. The same day the increase was pared down to 1.7 per cent. And on September 6, crude oil prices fell by as much as 2 per cent following reports of a statement by the Saudi Arabian Energy Minister that there was no need to freeze output for now.

Perhaps this is a reflection of the new world oil order, where the supply-demand equation is the predominant determinant of international oil prices — a fall back to the situation prevailing in 1986 and 1998 when oversupply drove down prices. In contrast, in 1973 and 1979-1980, geo-politics drove crude oil prices through the roof, whereas in 2008, speculators had a field day with crude oil prices rising to $147.27/barrel in July, before falling to $30.28/barrel by the end of the year.

Stabilising the crude oil market would have required Russia and Saudi Arabia — the two largest producers in the world — to set a ceiling on their production and, by implication, agree to a ceasefire in the battle for a higher market share of the world market. This was an unlikely possibility since it would have put a question mark on Saudi Arabia’s recent policies to go all out for market share by ramping up production, irrespective of the impact on prices.

Doing this had made a big hole in its forex reserves, slashed its budget, stymied projects and run up domestic discontent as subsidies were reduced. It had to accept the possibility that a production freeze may enable Iran to gain a larger share of the world market, without significantly raising prices. This was clearly an unacceptable proposition since besides being economic rivals, they are on opposite sides in the conflict zones of Syria, Iraq and Yemen.

Meanwhile, global crude oil supply continues to outstrip demand, something that could not have eluded the attention of policy makers of oil exporting countries. As per BP Statistical Review 2016, the global crude oil production rose by about 2.8 million barrels/day whereas consumption went up by 1.9 million barrels/day in 2015. With Iran joining the party, the oversupply position is expected to continue.

Uncertainty is the only certainty in the world of oil — the most politicized commodity in the world. Although unlikely, black swan events like a precipitous increase in demand or a major producer going out of action could disturb the prevailing low price regime in the near future.

Low prices increase geopolitical risks, as oil producers fight for market share and battle internal discontent. Nigeria, Venezuela, Algeria, Libya and Iraq — the ‘fragile five’ — remain particularly vulnerable. And the Russian economy shrank by 3.7 per cent in 2015.


For India, however, the overall outlook in a low price regime is positive. It means lower inflation and fiscal and current account deficit, higher consumer savings and a boost to the aviation sector. A fall in remittances, exports and foreign investment are some of the possible downsides. If and when prices cross $70/barrel there could be cause for concern. Besides increasing the trade deficit, the clamour for reducing excise duties if accepted, would immediately raise the fiscal deficit, a truly a worrisome situation, were it to occur.