Crude oil prices fell to a 6-week lows last week on account of slowing demand.- The Israel-Hamas conflict can possibly drive prices back to the above $90 per barrel zone, analysts worry.
- If crude stays above $90 per barrel, it will affect Rupee, wholesale price inflation and more.
This war has undone a smidgen of relief seen last week by the Indian markets, as its prices slipped sharply on account of demand concerns. The commodity had posted its biggest weekly loss since March 2023 – and slipped to 6-week lows.
With escalating tensions in West Asia where the world gets a third of its crude oil from might drive it back towards the $90 per barrel zone. It can have devastating effects on India and other crude importing nations.
“If it goes back to $90 per barrel, oil prices will move, and will affect the currency. RBI will have to intervene with bond market sales that can stiffen bond yields. It will also impact Wholesale Price Index (WPI) inflation,” Madan Sabnavis, chief economist at Bank of Baroda told Business Insider India.
The pump prices can be controlled by the government, so its impact on retail inflation can be varied. Last week, airlines introduced a fuel surcharge due to rising jet fuel prices – making flight tickets pricier.
The Indian rupee rose 4 paise in the morning trade on Monday as it opened at 83.24 against the US dollar.
What are the odds?
Economics and analysts are closely watching the developments. The medium term prices will be guided by how long drawn out the war will be. The Ukraine-Russia war has been ongoing for over a year-and-a-half and is showing few signs of winding down.
The length of the Israel-Hamas war will depend upon the support Hamas might receive from its allies. “We will have to wait for a week to see if other Arab nations will stand aside and take a neutral position or join Hamas,” said Madan Sabnavis, chief economist at Bank Of Baroda.
If Iran, which is known to be a supporter of Hamas, is drawn into the war, it might actually turn into a long-drawn war. Iran also controls the sea routes of oil supply and if it enters the war, it can have devastating effects, experts say.
“Presently, it is unlikely to cause major disruption in oil supplies thereby impacting major oil importers like India. But the situation will change if Iran, a major Hamas supporter, is drawn into the war. That can disrupt oil supplies causing a spike in crude,” said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.
Saudi and Russia to keep cut their cuts
The crude oil prices have been on an upswing ever since March this year on account of many factors. The most important of which is voluntary production cuts taken by two of the world’s largest oil producers — Saudi Arabia and Russia. Between both of them, they have cut oil production by 1.3 million barrels per day.
Oil producing cartel OPEC+ did not make any changes to its policy in its recent meeting. Also, both the countries reaffirmed that their additional voluntary cuts will continue through to year-end. The move drove up prices, but also affected demand.
“US gasoline inventories increased by almost 6.5 MMbbls over the week – the largest increase since January 2022. This move has helped to take total US gasoline inventories back above the five-year average for this time of year,” said a report by ING Vysya which predicted Brent to average to $92 per barrel ahead of the Israel-Hamas conflict.
This week’s developments on the war will guide the price movements from here and a clearer picture might emerge this week, experts opine.