New Delhi: With the coronavirus outbreak adding another level of uncertainty to the global energy markets, all eyes are on the two-day meeting of the Organization of the Petroleum Exporting Countries (Opec) and its allies starting Thursday, which is expected to announce deeper production cuts.
The so called Opec plus meeting in Vienna, which includes Russia, comes in the backdrop of Opec slashing the global oil demand growth by 0.99 million barrels per day (mbpd) in 2020, with the Coronavirus outbreak in China accounting “for most of the downward revision". Also, the US Federal Reserve reduced its policy rate by 50 basis points on Tuesday.
While the global crude oil prices were on a downward spiral in the backdrop of coronavirus outbreak, they gained on Tuesday on production cut expectations. International benchmark Brent crude was trading at $52.26 per barrel. Crude prices hit a record $147 per barrel in July 2008.
The World Health Organization (WHO) has upgraded the global risk of the coronavirus outbreak to "very high" – its top level of risk assessment.
According to Opec’s Monthly Oil Market Report, the demand was lowered by 0.23 mbpd. Concerned over the situation, its technical panel recommended a provisional cut to the Opec plus arrangement. This assumes importance given that any further supply cuts will have wide-ranging impact on energy markets, as Opec accounts for around 40% of global production. Also, the Paris-based International Energy Agency (IEA) has cut global oil demand growth outlook.
According to Austin-based Stratfor, a geopolitical intelligence platform, the Opec plus arrangement may simply agree to adopt the recommendation of the cartel's technical committee for 600,000 barrels per day cut.
Every dollar rise in the price of oil increases India’s import bill by ₹10,700 crore on an annualized basis. India spent $111.9 billion on oil imports in 2018-19 and is a key Asian refining hub, with an installed capacity of more than 249.4 million tonnes per annum (mtpa) through 23 refineries.
“Russia is again finding itself with the upper hand in relation to the Saudis as the OPEC+ meeting in Vienna from March 5-6 approaches. The Saudis face a likely Russian refusal to take their share of a headline cut above 600,000 bpd, and could only go beyond that by caving in and doing more unilaterally, an unatttractive option," said Stratfor energy analyst, Greg Priddy.
This comes against the backdrop of oil markets facing a situation called contango wherein the spot price is lower than a futures contract.
India’s energy needs are mainly met through imports, and Opec accounts for around 83% of the country’s total crude oil imports. Any production cut by the so called Opec plus arrangement may also compromise India’s energy security efforts in the short run. India is the world’s third-largest crude oil buyer and the fourth-largest LNG importer.
The oil prices have a major bearing on how consumers such as India manage inflationary and fiscal pressures. Weighed by a decline in the manufacturing sector, India’s factory output contracted in December while retail inflation accelerated for the sixth consecutive month in January, raising doubts on the recovery process of the fledgling Indian economy. India’s economic growth is estimated by the National Statistical Office to hit an 11-year low of 5% in 2019-20 on the back of sluggish consumption and investment demand.
The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, averaged $65.52 in December 2019, according to data from the Petroleum Planning and Analysis Cell. The price was 50.94 a barrel on 2 March. The Indian basket represents the average of Oman, Dubai and Brent crude.
From world famous Louvre museum closing down to an overhang of uncertainty over the impending Japan Olympics, the coronavirus outbreak has been claiming high profile events including Daniel Howard Yergin led CERAWeek.
There are also growth concerns triggering worries about another recession of the likes of 2008.
“COVID-19 is arguably the biggest risk to global growth since the Great Recession. The rolling geographic nature of the virus’s spread means its duration could be extended into the second quarter," S&P Global Platts said in a statement.
Battling a severe slowdown, India has been imploring Opec to not affect deeper crude oil production cuts. India has also been pitching for better commercial terms for crude oil imports. Retail prices of petrol and diesel in India track global prices of these fuels, not crude, but they are broadly linked to crude oil price trends.
Mint reported on 16 February about the sluggish Indian economy and industries that are heavily dependent on crude oil such as aviation, shipping, road and rail transportation likely to gain from a sudden drop in crude oil prices due to the coronavirus epidemic in China, the world’s biggest oil importer.
