Opinion Express View on OPEC’s new move: Crude cuts

On Sunday, OPEC+, a group of 23 countries (13 belonging to the Organisation of Petroleum Exporting Countries and 10 non-OPEC ones including Russia), announced further cuts to crude oil production for 2024. OPEC+ pumps 40 per cent of the world’s oil and is the most influential body when it comes to crude oil prices. Twice in the recent past, OPEC+ cut oil production; first a cut by 2 million barrels per day in October last year and then a surprise cut of 1.6 million bpd in April. Now the group has agreed to reduce overall production targets from January 2024 by a further 1.4 million bpd to a combined output of 40.46 million bpd. Leading the pack would be Saudi Arabia, the biggest OPEC producer. The moves come in the wake of weakening crude oil prices and have implications for India’s economic recovery.

Crude oil prices have come down sharply from above $120 a barrel exactly a year ago to around $70 a barrel. A big reason for this has been the weakness in global growth. The IMF expects the advanced economies to grow by just 1.3 per cent in 2023. Germany has recently entered a recession. The UK is expected to grow by a feeble 0.4 per cent. At 0.6 per cent, France is expected to grow equally anaemically. The US, the world’s biggest economy, is at present expected to grow by 1.2 per cent. This means that demand for oil has fallen behind supply and this trend is likely to continue. This, in turn, implies prices will continue to fall unless OPEC intervenes with supply cuts. The latest decision is expected to provide a floor to crude oil prices. Global crude oil prices are not determined in a free market manner – OPEC and its allies tend to tweak production levels to manage prices in a way that supports their economic well-being without necessarily damaging global growth.

Advertisement

For India, which imports crude oil to satisfy more than 80 per cent of its needs, softer prices are always welcome. To that extent, production cuts will hurt India. However, two developments have complicated the picture. One, India is increasingly importing crude oil from Russia at lower than market prices. In May, Indian refiners (led by IOC) imported 2.16 million bpd of Russian crude oil — that’s 45 per cent of India’s overall crude oil imports for the month. Two, even though global market prices of crude oil have fallen by around 40 per cent over the past year, Indian consumers have not seen any downward price revision. This is crucial as Indian consumer demand has started faltering over the past two quarters. If domestic pump prices reflect the global price trend, it will likely boost India’s economic recovery.