With Brent touching five-month high on Monday, Goldman Sachs has raised its crude oil price forecast for this year, in what could worry for the Indian government and consumers alike, who may have to face a higher inflation and rising fuel prices at home. Brent crude oil price has been on continuous rally owing to tensions in Libya — one of the largest oil producers in the world, decline in supply by OPEC countries, and US sanctions against Iran and Venezuela.
Considering that India is a major importer of crude oil, the trade tensions between the developed economies and supply cuts by OPEC countries may have an impact on oil prices in India going forward. The rise in oil prices will have a direct impact on the current account deficit, while some of the effect might rub off on the fiscal deficit too.
On the other hand, higher crude oil prices may spell trouble for people as well. inflation is under RBI’s medium term target of 4% for now. But the rise in crude oil prices may lead to a surge in petrol and diesel prices, and an accompanying recovery in food prices may stoke inflation going ahead.
Inflation under control, or not?
The World Bank in its recent report noted that the consistent decline in food prices along with appreciation of the rupee, lowering of oil prices has resulted into subdued inflation in FY19. However, it said with the recovery in food prices and robust growth, inflation is likely to converge towards RBI’s inflation target of 4%.
The domestic oil prices are generally determined by the overseas crude oil prices and the value of rupee in terms of dollar. Looking at the diesel prices in India in the last quarter of FY19, the fuel prices in the national capital, ranged between 62-66 in January, while in February and March there has only been a slight change in prices fluctuating between Rs 65 and Rs 67 a litre. On the other hand, petrol prices flitted between Rs 68-72 a litre during January-March in Delhi. In March, petrol prices were almost stagnant.
Investment bank Goldman Sachs expects benchmark Brent crude prices to average $66 per barrel in 2019, compared with its previous estimate of $62.50, Reuters reported. It expects US crude oil averaging $59.50 per barrel, up from its last forecast of $55.50.
“While the macro risk-on environment and the threat of disruptions may drive spot prices even higher, we still expect that prices will decline gradually from this summer as shale and OPEC production increases,” Reuters quoted Goldman Sachs as saying in its report.
“Oil prices have been gaining on the back of geopolitical tension and tighter supply concerns, particularly the escalation of recent Libya conflict. Besides, supply curbs by OPEC and US sanctions against Venezuela and Iran continue to support Brent prices. Russia ‘s recent signalling on raising output has not helped much in terms of easing oil prices,” Madhavi Arora, Economist, Edelweiss Securities told Financial Express Online.
How high it will go?
Goldman Sachs expects Brent prices to reach at $72.50 per barrel in the second quarter, compared with $65 previously. But it maintained its 2020 Brent oil price forecast at $60 per barrel. It expects the global oil market to remain in a supply-deﬁcit of about 0.5 million barrels per day in the second quarter, the Reuters report said.
Brent crude oil ended over $70 for the first time since November. “This is more a supply story than a global growth story,” Torsten Slok of Deutsche Bank said in an interaction with Bloomberg TV while talking about the potential for Brent Crude to reach $75 a barrel.
“While the macro risk-on environment and the threat of disruptions may drive spot prices even higher, we still expect that prices will decline gradually from this summer as shale and OPEC production increases,” said Goldman Sachs.
According to a Reuters report, the investment bank thinks the OPEC exit from the current supply cuts will be a key influence on oil prices in the coming months and years.