Will oil touch $100 again and India’s changing dynamics on oil sourcing

In the beginning of September 2018, in my article The rising prices of Fuels and short/medium/long term solutions, I had made few suggestions. I am happy to note that my recommended solutions were consistent with the thinking of the policy makers, as, within a week’s time, both central government and state government reduced the duties on both Petrol and Diesel. The Indian government has now announced to increase the number of Strategic petroleum reserves(which was my medium-term solution), which means that India will be able to improve safety stocks to 22 days from the current 10 days.

After this article and recent crash of stock market(which was linked to surging oil prices & resultant rupee depreciation), many people were asking me whether crude will touch $100 and what could be India’s response to mitigate this impact. Though crude had crossed $83 and was touching $85 in the beginning of October 2018,my quick thoughts shared on What’s app with them were as follows (in verbatim)- I don’t think,OPEC can afford to increase crude price beyond $90(even 85). The reason is that the migration to renewable energy + Shale gas will only be accelerated. That would be damaging their future too quickly. Iran shortage is already factored into the rally so far, so even after USA sanctions on November 4th will not have much impact (at the most knee jerk for few weeks).

I must admit that I am not an astrologer for predicting the prices of oil or recommending (always) the right solutions, but what I am trying to do is to table the facts and share the rationale behind my thoughts. Of course, there are few factors( mainly geopolitical), which will go beyond any rationale, but then that is a life, full of uncertainties and unpredictable scenarios. Isn’t it?

Let’s understand the global scenario first. There are 7 OPEC members ( Venezuela, Saudi, Iran, Iraq, Kuwait, UAE and Libya) in the top 10 countries with the largest proven oil reserves. The other non-OPEC members are Canada(3rd), Russia(8th) and USA(10th). Interestingly Russia(1st) and USA(3rd) are two major Non-OPEC members, who are major oil producers in the world. Saudi is the 2nd largest producer of oil, whereas Iraq stands at no.4 and Iran stands at no.5. Russia and Saudi are the major exporters, whereas the USA is no longer completely dependent on OPEC countries to meet their requirement of oil, thanks to the Shale revolution in the country. It is to be noted that break-even of shale gas( equivalent to WTI crude oil) is approx.$50 and it is expected to come down with technology advancement. The USA is expected to become a net exporter of oil and gas by 2022.

Russia, another non-OPEC country has the highest natural gas proven reserves in the world. Currently, the challenge for gas to become a global energy source is due to transportation ( needs to liquefy Gas before exporting and then re-gasify in the imported country). However, once there is a cost-effective solution( like inter-country pipeline etc.), Russia would become another major global energy supplier.

So clearly it is not going to be sustainable for OPEC members to keep prices of crude oil higher for long, else it will only accelerate the production of shale gas and renewable energy in the world.

So the message is loud and clear that even if global demand is picking up and there could be some supply constraints due to the shortage of Iranian crude, there are enough supply points globally, which again lead to believe that crude can’t go to $100 in medium to long term. Also, I feel that the market has already factored shortage of Iranian crude into rally to $85, so any further increase post US sanctions on 4th November will not last long.

With short of Iran crude, OPEC members like Saudi Arabia and Iraq have already stepped up the production. Today, the dynamics of the market from 2012( when there were sanctions on Iran) are totally different. Fundamentals are healthy and there is abundant crude in the market — mainly sweet and light oil. This time around, it is not hard to replace an Iranian shipment, even from within OPEC, as many countries — including Iraq, Saudi Arabia, Kuwait, and the UAE — have invested in adding capacity.

It is hard to tell whether the new sanctions will spell the end of the OPEC plus agreement.

So what would be India’s response to changing dynamics.  As of now, India has managed to secure supplies from Iran also in November(in INR), as Indian refineries are configured to process Iranian oil- this means that they can’t switch to other suppliers easily. Iran is providing significantly cheaper oil than any of its competitors, as well as offering extended credit terms and practically free shipping. Its proximity to India also helps reduce transport costs.

Hopefully, crude prices will start softening, with oil coming from OPEC members like Saudi, Iraq, Kuwait and non-OPEC country like Russia. India will have to leverage its position as a world’s third largest consumer of crude oil, to ensure that it doesn’t pay more. Clearly, it poses a great challenge to policymakers in India, but then I am sure, India will come out with strong solutions. It is important to note that India’s share of global energy demand rises to 11% in 2040 from 5% in 2016( as per BP Energy Outlook 2018 report),so any country dealing with India will not be tactical in their pricing agreement and rather try to build a strategic relationship by offering better terms.

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