The confluence of OPEC+ alliance proposing production cuts, Europe’s sanctions on Russian crude imports, and a low US SPR (Strategic Petroleum Reserve) may result in crude oil prices rising to as high as $105 per barrel this fiscal year, Kotak Securities said in a research report. The OPEC and its non-OPEC allies, collectively called as OPEC+, in the most recent gathering in Vienna, decided to voluntarily cut production by 2 million barrels per day, starting November 2022. Another factor adding to the impact on oil prices is Europe’s sanctions on Russian crude imports, which will come into play from the first week of December. Furthermore, the American oil reserve release, which the nation planned to halt in October, has been further extended till November, dragging the reserves to multi-year lows. As a result, Kotak analysts expect the crude oil market to tighten.
OPEC+ Oil Producers
The OPEC+ output reduction comes even as production levels are already lower by 3.5 million barrels per day, the Kotak report noted. As of August 2022 oil production was 40.4 million barrels per day than the target of 43.9 million barrels. OPEC – Nigeria, Iraq, Angola, among others – and non-OPEC – Malaysia, Kazakhstan, and Azerbaijan, among others – oil producers are struggling to meet production targets. Four in the ten OPEC producers – Saudi Arabia, UAE, Iraq, and Kuwait – have seen a notable rise in production in 2022, the report mentioned. The overall slumping oil production has made it likely for November to witness a production cut of roughly 1.1 million barrels per day, in addition to the voluntary cuts.
Russia’s war on Ukraine has triggered European countries to impose sanctions on imports of Russian crude oil. This has brought down Russian oil exports substantially with a decline of nearly 1.7 million barrels a day in August. With fresh sanctions scheduled to become active on December 5, 2022, Kotak analysts expect the export to incur an additional cut of 1 million barrels per day. Russia is a major exporter and is one of the ten OPEC oil producers.
US Oil Reserves
The analysis by Kotak Securities also stated that large SPR releases by the United States cannot sustain for long. The US, under a 6-month plan, has been releasing almost 1 million barrels a day, which was supposed to end by October. However, after the OPEC+ decision, the White House ordered a release of another 10 million barrels in November, leading to a further decline in reserves.
Crude oil price impact on India
The elevated prices will have a grave impact on India, which is a major oil importing country. The downstream oil marketing companies, which are already struggling to align the retail fuel price with the international prices, have incurred substantial under-recoveries, amounting to almost Rs 1 trillion in the first half of this fiscal year, the report estimated. Factoring in the global disruptions and shortfalls in production, the deficit in Q3FY23 is expected to be about 1.9 million barrels per day, and may go up to 2.7 million barrels a day in the next quarter.