On Wednesday, the Organisation of Petroleum Exporting Countries (OPEC) and its allies announced their decision to slash crude oil output by two million barrels per day ahead of the peak winter months. The decision will come into effect from November this year. The deep production cuts, equivalent to around 2 per cent of global supply, will only tighten the global oil market. Crude oil prices, which had fallen off the highs seen in June, and hit a recent low of $82 barrel last week, rose above $93 per barrel on Wednesday following the news.
Such sharp supply cuts, driven by the desire to maintain prices, will offset the release of strategic oil reserves that was designed to bring down the price of oil and help consumers at a time when inflation has surged across the world. After the OPEC+ meeting in Vienna, Timipre Sylva, the Nigerian minister of state for petroleum resources, is reported to have said that, “OPEC wants prices around $90”. This suggests that $90 per barrel will effectively become the floor price. Such high oil prices will only complicate the task before central banks across the world who have been hiking interest rates to tackle surging inflation. Following the announcement by the OPEC+ countries there are reports that the US government may “ease sanctions” on Venezuela, paving the way for a potential reopening of US and European markets to oil exports from the country in order to boost oil supplies.
For oil importing countries like India — the country imports around 80 per cent of its requirements — elevated crude oil prices pose problems at multiple levels. Over the past few months, India has in fact benefited from lower oil prices. Recent trade data showed that in September oil imports had dipped to $15.6 billion, down from $17.6 billion in August, with much of the decline due to a fall in crude oil prices — the price of the Indian crude oil basket has declined from $105.59 in July to $97.4 in August and further to $90.71 in September and $90.29 in October as per data from the Production Planning and Analysis Cell. However, a reversal in prices will increase the cost of oil imports, exerting pressure on the current account deficit. Further, high crude oil prices will also be inflationary. The RBI’s recent inflation forecast of 6.7 per cent for 2022-23 assumes crude oil to average $100 a barrel. Deep cuts in global supplies, elevated prices, imply little respite from high inflation.
