Even as India downplays the recent move by the US asking it to stop buying Iranian oil, the economy may be up for more shocks going ahead, analysts said.
Even as India downplays the recent move by the US asking it to stop buying Iranian oil, the economy may be up for more shocks going ahead, analysts said. Spike in oil prices, as a result, may have an effect on inflation, even leading to losses in the stock markets, they added.
The Donald Trump administration, on Monday, ended exemptions on crude oil imports from Iran raising concerns over inflation and fiscal deficit setting for FY20. The Significant Exemption Reduction (SER) that extended beyond May 2 will now cease to exist on the given date, US secretary of state had Mike Pompeo announced yesterday. This puts eight countries, including India and China, in a tangle as Iran has been a long-term oil provider for them.
“Oil could remain high for a prolonged period of time which is not good for India due to significant imports as well as its impact on inflation. Overall markets are not setup for a prolonged high oil price cycle. If it plays out then we could see markets give up some gains.” veteran investor Sandip Sabharwal told Financial Express Online
After the markets reacted negatively to the announcement yesterday, Petroleum and Natural Gas Minister Dharmendra Pradhan today tried to calm the nerves saying that a robust plan has been put in place to maintain adequate supply of crude oil to the refineries. “There will be additional supplies from other major oil producing countries;Indian refineries are fully prepared to meet the national demand for petrol,diesel & other Petroleum products,” he also said.
The continued uptick in oil prices could impact the next RBI MPC, Madhavi Arora Economist, Edelweiss Securities said. Considering central bank has fixed India’s crude basket at $67/bbl for FY20 for its inflation forecasting, the latest move by the US could be more impactful, she added. The economy is already weighing under potential risks of uneven monsoons, uptrend in food inflation, and fiscal reflationary impulses, she noted.
Since March, the oil prices are on the rise over concerns related to OPEC and sanctions on Venezuela. The Brent crude prices have surged nearly 15 percent from $64.76 per barrel on February 25 to $74.31 yesterday, the highest in the six months. On October 31, 2018, Brent crude closed at $75.47 per barrel.
In FY19, India imported 23.5 million tonnes from Iran. Considering India’s energy needs are mainly met through impots, the waiver could impact the mathematics. Any surge in oil prices directly impacts the import bill and widens the trade deficit. For every dollar increase in the oil rates, the import bill by nearly 11,000 crore on a yearly basis. Interestingly, the US decision comes at a time when the country is in the middle of general elections.
“The key player on the crude oil price game now is Russia who clearly does not need such high oil prices and would like to increase production to capture the spike in prices. If the Opec plus arrangement sees signs of a crack then Oil prices could stabilize or even correct a bit”, Sandip Sabharwal said.
However, the oil prices could remain high for an extended period of time if it’s not, he added. It’s not good for India, he noted.
The crude oil prices may not remain on an upward trajectory for longer period as the US presidential election is scheduled next year, said Rushabh Maru, Research Analyst – Currency and Commodity, Anand Rathi.
“Trump may pressurize other OPEC members to raise production. Overall crude oil may rise further in the near term. But over the long term, there would be lot of uncertainty. We expect Brent to face stiff resistance at $80,” he said.