Global crude oil prices have witnessed a remarkable 30% surge over the past three months, primarily attributed to concerted output reductions initiated by oil giants Saudi Arabia and Russia. The ascent in oil futures toward the $100 per barrel threshold has prompted some investors to capitalize on the rally amid prevailing macroeconomic concerns. It is worth noting that oil prices crossing the $100 per barrel milestone could potentially intensify inflationary pressures on the global economy, compelling central banks to consider raising interest rates once again.
The front-month Brent November futures registered a marginal decline of 7 cents, settling at $95.31 per barrel as the contract reached its expiry. Nonetheless, it recorded an overall increase of approximately 2.2% throughout the week and an impressive 27% surge from July to September. Meanwhile, the more liquid Brent December contract saw a decline of 90 cents, closing at $92.20 per barrel. In the United States, West Texas Intermediate (WTI) crude experienced a 92-cent downturn to reach $90.97 per barrel. Over the course of the week, WTI rose by 1%, and it demonstrated an impressive 29% ascent during the quarter.
Domestically, on the Multi Commodity Exchange (MCX), crude oil futures with an October 19 expiry concluded 1.05% lower at ₹7,543 per barrel. The session witnessed fluctuations between ₹7,523 and ₹7,736 per barrel, compared to the previous day’s closing figure of ₹7,623 per barrel.
The recent rally in crude oil prices can be attributed to several key factors:
1. Extension of Production Cuts: Earlier this month, Saudi Arabia and Russia announced an extension of their voluntary oil output cuts, amounting to a combined reduction of 1.3 million barrels per day (bpd), extending these measures until the end of the year. This decision triggered a significant surge in international crude prices, reaching nearly a one-year high. The announced supply cuts by these two major oil-producing nations are expected to exert a dominant influence on oil prices for the remainder of the year.
2. OPEC+ Agreement: These developments occurred in conjunction with the ongoing output cuts agreed upon by the Organization of the Petroleum Exporting Countries and its allies (OPEC+), which are set to continue until the end of 2024. The past week witnessed a nearly 1% increase in oil prices, reaching a nine-month high, driven by rising US diesel futures and concerns surrounding tighter supplies.
3. Global Oil Demand Forecasts: OPEC maintained its projections for robust growth in global oil demand for 2023 and 2024. The producer group anticipates an increase of 2.25 million bpd in world oil demand for 2024, compared to a growth of 2.44 million bpd expected for 2023. These forecasts remained unchanged from the previous month.
4. Decline in US Crude Stocks: US government data revealed a decrease of 2.2 million barrels in US crude stocks during the past week, bringing the total to 416.3 million barrels. Furthermore, crude stocks at Cushing, Oklahoma, a crucial storage hub and delivery point for US crude futures, contracted by 943,000 barrels, reaching their lowest levels since July 2022.
It is imperative to acknowledge that the impact of constricted global oil supplies could be offset if elevated interest rates impede demand. Notably, Minneapolis Federal Reserve Bank President Neel Kashkari’s recent hawkish statement in the United States has cast uncertainty on whether the central bank has concluded its rate hikes. Elevated interest rates contribute to higher borrowing costs, potentially curtailing economic growth and diminishing oil demand.
Implications on Indian Markets:
The recent surge in crude oil prices has affected Indian markets in various ways:
1. Foreign Portfolio Investors (FPIs): FPIs turned net sellers in September, primarily influenced by the strength of the US dollar index and the high US 10-year bond yield, which present short-term challenges for FPI capital flows to emerging markets like India. Additionally, the surge in crude oil prices during the last week of September weighed on FPI market behavior.
2. Foreign Institutional Investors (FIIs): FIIs have been sellers in cash markets in September, amounting to ₹25,000 crore. The US Treasury yields reached a 16-year high, and crude oil prices nearly approached $98 per barrel last week. These factors, coupled with concerns regarding persistently high interest rates and their impact on the global economy, have contributed to FII selling.
3. Market Outlook: Analysts anticipate that the sustained selling by foreign investors, combined with global indicators such as rising US bond yields and crude oil prices, paints a challenging outlook for the near-term performance of Indian markets. The benchmark Nifty 50 index has retraced from its record-high level attained earlier this month, and market sentiment is expected to remain bearish until Nifty surpasses the 19,750 mark.
In conclusion, the global oil market’s dynamic and the resultant surge in crude oil prices carry significant implications for both the global economy and Indian markets. The interplay between supply cuts, demand forecasts, and macroeconomic factors will continue to shape the trajectory of oil prices and its broader impact.
