Brent Crude Crosses $87/bbl on Supply Concerns

At the start of December 2021, Brent Crude was at just about $69/bbl. Over the next 48 days, Brent has moved up by a whopping 26% to $87/bbl. In fact, for the last 4 weeks in succession, Brent crude has closed with gains. In a way that is ironic because Omicron was supposed to hit growth, reduce travel and impact the demand for crude. Nothing of that kind has happened.

Brent Crude at $87/bbl is almost at a 7-year high. These levels were last seen in 2014 before the big shale driven crash in oil prices started. Even during the massive oil rally of 2018, the maximum price that oil could scale was $85/bbl. Now oil is at its highest level seen since 2014. There are several reasons for this spike in crude prices.

Check - What is Driving the Rally in Oil Stocks in India?

Firstly, the Omicron impact has been extremely limited. While there has been a rise in the number of infections, the fatalities have been very limited, unlike the 2020 version. That has given markets the confidence the much-feared demand contraction may not happen after all. Most of the global goods and people movement is at near normal levels with no signs of any supply chain constraints.

Additionally, there is also pressure on the supply side. Most of the large oil producers are not keen to add supply in a big way and neither OPEC nor Russia nor the US is keen to hike the output. The current price level are allowing a lot of oil companies to recoup the losses of the last few year and nobody really wants to give up on that benefit chain. That means; crude oil prices will remain elevated for some more time to come.

While there are no official estimates for now, analysts believe that large scale long position building has not started in crude oil. That means; once that starts, it could spike oil by another $10-15 and take it closer to the $100/bbl levels. That may not really be great news for India. Here is why.

India still relies on imported crude for 85% of its daily oil needs. That means the landed cost of oil will have an oversized impact on domestic trade deficit and also on domestic inflation. It has been estimated by the RBI that a sharp spike of $10 in crude oil prices could boost inflation by 50 bps and it could boost the fiscal deficit by nearly 44 basis points as a percentage of GDP. That means, the fiscal deficit for FY22 may end up being 7.3% instead of 6.8% as is estimated now. That is what India would be concerned about.

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