Grim oil scenario

OPEC8217;s decision on Sunday to raise oil supplies by 800,000 barrels a day is disappointing for India as Ram Naik, minister of Petroleum, has been quick to point out. Naik thinks that something in the region of 1.1 million barrels a day would have made the situation more comfortable. But one guess about what new level of output from members of the Organisation of the Petroleum Exporting Countries would depress international oil prices is as good as another. At this stage, oil importing countries can only wait and see what happens. A number of factors have fed into the recent rise in oil prices to 10-year highs of 35 a barrel and more. Speculators have played a part alongside the strong demand for oil from growing economies and low US oil inventories in driving up prices. Two earlier OPEC supply hikes since April raised the quota by 2.4 million barrels per day bpd without making a sufficient dent in prices which have gone up relentlessly. Therefore, there appears to be a need for clear demand and supplysignals from key players, going beyond the latest OPEC commitment to raise production, before there can be an impact on the market.

Much depends on how Saudi Arabia and the US act over the next few weeks. If, as OPEC president Ali Rodrigues of Venezuela says, the organistion cares about stability in the oil market and fair and reasonable prices for consumers, it must be prepared to take action again soon if prices do not come down to the targeted 22-28 per barrel. That means agreeing to Saudi Arabia raising supplies. It is the only member of OPEC with spare capacity estimated at 2.5 million bpd and though the Saudis appeared to want a million bpd OPEC hike last weekend they were stymied by Iran and other hardliners. Still, the Saudis are reported to have told the US they are prepared to increase their quota by another 500,000 bpd if the situation warrants. But the Saudis have also said they exceeded their quota in July by a whopping 600,000 bpd. The mystery is why the impact on prices has been the reverse of what could reasonably be expected. Where have the barrels gone? As for the demand side, if the Clinton government decides torelease some of its strategic reserves of oil 8212; and it will want to keep the lid on prices during the presidential elections 8212; there could be a positive effect on international oil prices. The US is by far the biggest consumer of oil.

For India the scenario is bleak. The general assessment in the market is that after a slight fall, oil prices are likely to remain firm for the rest of the year because of the demand in the US and Europe for heating oil in winter and for replenishing inventories. A pronounced fall in prices is not probable before next March or April. That means estimates of a Rs 15,000 crore deficit in the oil pool account are likely to hold. Among the options being considered by the government are price hikes, according to Ram Naik. However, the government must be cautious given the inflationary impact of the earlier series of prices increases by oil companies. Over and above that there have been state levies. An accelerated inflation rate would stifle economic growth and that must be avoided at all cost.