Crude prices to remain elevated for 2023 after touching $90/bbl amid supply cuts: Energy experts

Oil prices touched $90 per barrel on September 5, the highest in the last 10 months

Crude oil prices are expected to remain elevated through 2023 amid production cuts, according to energy experts.

Oil prices touched $90 per barrel on September 5, the highest in the last 10 months, after Saudi Arabia and Russia extended supply cuts till the end of the year.

"With the supply cuts from Saudi Arabia, we expect crude oil prices to remain elevated. Now, the critical drivers would be a recovery in Chinese demand and inventory buildup in the US, as their inventory is declining. So, as and when they come to the market to build up that inventory, we might see more tightness in the market," said Probal Sen, Energy Analyst at ICICI Securities.

The jump in oil prices comes after Saudi Arabia announced on September 5 an extension of the one million barrels per day (bpd) production cut until December 2023. Russia also announced the extension of its voluntary export cut of 300,000 bpd until the end of the year.

"These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide," said Rystad Energy.

"The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the US, to curtail inflation. Western leaders, wary of an oil price spike, could explore import adjustments or open diplomatic discussions to help mitigate the impact and tame inflation," it added.

Factors affecting prices

Crude oil prices have gained momentum since the second half of 2023, mainly due to tighter supply in the market after the Organisation of the Petroleum Exporting Countries and its allies, commonly known as OPEC+, implemented additional production cuts.

Starting July 2023, Saudi Arabia implemented an additional production cut of one million bpd. Also, OPEC+, in May, cut oil production by 1.6 million bpd for 2023.

In the May cuts, Saudi Arabia had reduced supply by 500,000 bpd, while Iraq had cut over 200,000 bpd until the end of the year. Russia, which is part of OPEC+, had announced an extension of its production cut of 50,000 bpd till the end of 2023.

Other factors, including demand from China, the largest energy consumer in the world, and the health of the global economy, are also affecting prices.

"Continued production cuts by Saudi Arabia and other countries, global inventory levels, and a pickup in air travel in China are some of the factors that would determine crude prices," said Sabri Hazarika, Research Analyst, Emkay.

Impact on India

International crude oil prices directly impact India, as the country is a net importer of crude oil, with over 85 percent of its requirements being met by imports.

Due to rising oil prices, the Indian government reimposed the windfall tax on domestic production of crude oil in July after a gap of two months.

Additionally, state-run oil marketing companies (OMCs), which recorded huge losses in the first half of FY23, would be drastically impacted if crude prices rose.

"The sharp rise in Brent price to ~USD 90/bbl, driven by OPEC+ supply cuts, and surge in diesel cracks have led to OMCs’ blended spot auto-fuel gross marketing margin (GMM) declining to negative INR 0.1/ltr vs. +INR 8.8/ltr in 1QFY24 and vs. historical GMM of +INR 3.5/ltr," said JM Financial in a report.

"OMCs’ 2QFY24E EBITDA is likely to decline to INR 345bn vs. INR 483bn in 1QFY24, but it is still higher vs. normalised quarterly EBITDA of INR 160bn; HPCL will see the sharpest decline given its leverage to the marketing business," the report added.

Effect on consumers

Indian consumers have been reeling under the pressure of high fuel prices. Oil Minister Hardeep Singh Puri has urged OMCs in recent months to reduce fuel prices, but that might not happen if oil prices remain elevated.

After crude oil prices cooled in the first half of 2023, OMCs were expected to reduce fuel prices. However, with the elevated crude prices, OMCs might be unable to cut prices.

OMCs have left petrol and diesel prices unchanged since April 2022.