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FOCUS:Sound fundamentals to ensure oil rally doesn’t run out of steam

Informist, Tuesday, Jun 22, 2021

 

By Sayantan Sarkar

 

MUMBAI – The resurgence in crude oil prices this summer raised questions whether it's just another price bubble ready to burst. But the relentless increase in global consumption and a steady rise in the pace of COVID-19 vaccinations indicate otherwise.


Prices of crude oil have climbed steadily ever since lockdowns and restrictions in the US and Europe were eased in April. While West Texas Intermediate crude prices have surged nearly 25%, Brent has climbed more than 20%.


Currently, the WTI crude oil contract is at around $73 per bbl and Brent crude at $75, both at their highest levels in over two years.

 

"I expect crude to consolidate around current levels over the summer months," Vandana Hari, founder and chief executive officer of Singapore-based energy consultancy Vanda Insights, told Informist.

 

Goldman Sachs had recently estimated that Brent crude oil may hit $80 per bbl by September, while the Bank of America said prices might even touch three digits for a brief period next year. 

 

While global demand has risen, supply hasn't been able to keep up, especially with the Organization of the Petroleum Exporting Countries and its allies maintaining disciplined output curbs. At their next meeting, OPEC and its allies may decide to step up output from August, and even look to ease the remaining output cuts faster than the rate so far this year, Hari said.

 

In April, the cartel had agreed to ease some of its massive supply curbs and bump up production by a little over 2 mln bbl per day over May and July. Since May 2020, after oil prices had plunged to historic lows, OPEC had reduced its collective output by nearly 10 mln bpd. 

 

Experts say even if supply rises from August, it might not be enough to bring down prices. At best, there could only be a momentary halt in the rally. 

 

"Bubbles can grow to be big, but they burst quickly. The current price levels have a solid supply-demand foundation, and they are building on concrete signals," said Louise Dickson, oil market analyst at Rystad Energy.

 

With talks to revive the Joint Comprehensive Plan of Action (2015) nuclear deal between Iran and a few western nations not yielding any results so far, prices are expected to remain firm for the time being, experts say. 

 

Iran, which has one of the world's largest oil reserves, is under sanctions imposed by the US, which restrict it from exporting oil. Traders and market participants have been expecting the two countries to chalk out a deal, which would possibly lead to Washington removing some sanctions on Tehran's oil industry.

 

"When, and if, oil sanctions are lifted, they will most likely be done gradually. Therefore, oil supply from Iran will be limited to a few million barrels per day at the beginning," said Forex.com's market analyst Joe Perry. "Oil markets may pull back initially on the headline but should ultimately continue higher on expected demand."  

 

DOMESTIC CONCERNS

While higher prices of the commodity have brought cheer to producers, things have been different for India, which is dependent on imports to meet 80% of its energy requirements. 

 

In many parts of the country, fuel prices have hit triple digits for the first time. Nearly every alternate day in May saw fresh hikes in fuel prices in India, and June has seen nine such increases so far. 

 

"An analysis of the price build-up as on Jun 1, 2021, of Indian Oil Corp shows that excise duty and VAT (value added tax) comprise 58% of the retail selling price in Delhi for petrol, while in case of diesel, the VAT and excise duty is 52% of the retail price," CARE Ratings said in a report. 

 

As a result of steep excise duty hikes, the government has been able to generate incremental tax revenues of 2.4 rupees per ltr from petrol and 1.6 rupees per ltr from diesel in Delhi over the past five months, according to the report.

 

In May, inflation breached the 6% upper bound of the Reserve Bank of India's flexible target, the first time in six months, partly due to a steep rise in fuel prices.

 

On Monday, Informist had exclusively reported that the RBI had approached officials at the finance ministry and the Prime Minister's Office for reduction in the excise duty on petrol and diesel, as there was a high pass-through of this to end-consumers, ultimately feeding into inflation. 

 

Authorities in the country will also keep an eye on OPEC, as the group is scheduled to hold its monthly meeting at the beginning of next month to decide on output levels beyond July. 

 

OPEC and its allies will need to strike a balance between self-interest and the interests of their customers, especially those in Asia, said Vanda Insights' Hari.  End  

 

US$1 = 74.24 rupees

 

Edited by Avishek Dutta

 

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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