Crude Oil Hits 28-Month High

Nov 9, 2017

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20 January 2016. Crude Oil Price- US$ 27.88. Crude oil touched a 10-year low.

6 November 2017. Crude Oil Price- US$ 64.27. Short of 20 months, it increased nearly 130%.

This is a typical capital cycle. And it gets interesting every time.

The OPEC is expected to extend a cut of around 1.8 million barrels per day into the whole of 2018. Since June 2017 onwards, prices of Brent have been on the rise, on the back of a drop in US crude inventories, geopolitical tension between OPEC countries, and disruption in production caused by the hurricane activity in the US.

While supplies are tightening, demand is expected to remain strong this year. With this, oil prices gained more than 15% in September and October - their best two months in over a year.

But on the flipside, higher prices could bring on a wave of output from shale fields. US drillers have drilled a massive backlog of wells that have yet to be tapped. Production from those wells could come online quickly.

However, rising oil price is not good news from India's perspective.

Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.

Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.

Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

From India's perspective, rising oil prices warrant close attention. This could lead to rising risks of fiscal slippage, greater inflationary pressures, and lower likelihood of a rate cut by the Reserve Bank of India (RBI) in December prompt investors to review their positions.

Data Source: www.macrotrends.net

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