Why Crude Oil Prices Hold Steady Despite Global Political Instability

Crude oil price that peaked to $140 per barrel in March 2022 after the start of the Russia-Ukraine conflict now hovers between $82-$85 per barrel, and is expected to stay range-bound after the proposed June 1 meeting of OPEC+ to rollover the production cuts.

Rising inventories and lower demand projections on the back of slow industrial activity globally have not let crude prices go beyond $91 per barrel, even after the global oil alliance decided to cut output by 2.2 million barrels per day in November last year, and before that in December 2022, said Ashwin Jacob, partner-Energy and Chemicals at Deloitte India.

“Strategic inventories are getting topped up. Traders are not getting any signal to speculate,” Jacob said. “Given lower demand prospects, I am confident that the crude will hover around current levels of $82-$85 per barrel despite geopolitical concerns.”

According to the International Energy Agency, the global oil inventories surged by 34.6 million barrels in March, as oil-on-water swelled to a fresh post-pandemic high. Also, the preliminary data indicated that global oil stocks rose further in April.

However, the on-land stocks fell by 5.1 million barrels to their lowest level since at least 2016, as total Organisation for Economic Cooperation and Development stocks fell by 8.8 million barrels to a 20-year low, while non-OECD inventories built up for the first time since November.

Ian Bremmer, political consultant and president of Eurasia Group, told NDTV Profit in an exclusive interview that the impact of geopolitical tensions is visible more on global inflation if not on crude prices.

"Oil prices are now in low 80s, which definitely doesn't reflect the geopolitical premium, since US has become a net exporter with massive production of crude and LNG that has made life a lot easier," Bremmer said.

According to him, steady crude prices are also supported by excess refining capacity in China and lower global demand, along with 3 million barrels capacity on hold by OPEC.

"There is lot of capacity to respond to significant geopolitical tensions in Middle East and in Russia (if) refining capacities are getting hit from Ukrainians. Unless the world gets significantly worse than what it is today, there is no reason for the oil prices to go up," he said.

CareEdge Ratings on Wednesday noted that crude oil prices declined after reaching the peak in March 2022, led by global slowdown on account of sluggish recovery of the Chinese economy, interest rate hikes and inflationary pressures.

"However, in August 2023 and April 2024, there was a surge in crude oil prices due to production cuts announced by OPEC+, mainly Russia and Saudi Arabia. Geopolitical factors, including tension in Middle East, are also keeping the crude oil prices firm,” the rating agency said.

The global geopolitical crisis proved to be a blessing in disguise for India as it managed to save a total of around $13 billion in FY23 and FY24 on oil import bills, on account of discounted Russian crude supplies after global West sanctioned the Russian oil.

“The imputed unit value of Russian crude was 16.4% and 15.6% lower than the corresponding levels from West Asia (Saudi Arabia, the UAE and Kuwait) in FY 23 and 11M FY24, respectively,” ICRA said in a note.

However, this discount has now dissipated and has come down to around 8% on average between September-February period of FY24, as compared with 23% in April-August period of FY24. If the discount on purchase of Russian crude persists at the prevailing low levels, ICRA expects India’s net oil import bill to widen to $101-104 billion in FY25, from $96.1 billion in FY24, assuming an average crude oil price of $85 per barrel in the fiscal.

The rating agency warned that any escalation in geopolitical tensions and an associated rise in crude oil prices could impart an upward pressure on the value of net oil imports.

“A $10 per barrel uptick in the average crude oil price for the fiscal pushes up the net oil imports by around $12-13 billion during the year, thereby enlarging the current account deficit by 0.3% of GDP,” it said. “If the average crude oil price rises to $95 per barrel in FY25, then the CAD is likely to widen to 1.5% of GDP from our current estimate of 1.2% of GDP for the fiscal.”