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The challenge of predicting oil prices
Wed, 1 Aug Pre-Open

If economic and political activities could be measured, crude oil and natural gas prices could have been a decent barometer. No other commodity catches the macro events as fast as crude. Among the recent developments, the sanctions on oil imports from Iran over its nuclear program have brought Islamic Republic's oil production to a two decade low. One should have seen that coming when US put constraints over oil transactions with Iranian banks some time back.

So what could be coming next for oil prices? Will Iran answer back by suspending oil shipments through one of the world's busiest routes (Strait of Hormuz)? What impact will it have on already high prices? Well, there are no straight answers. It will depend upon counter strategy - how long the cut lasts and how well it is met by OECD (Organization for Economic Co-operation and Development) reserves. And then one will have to consider new oil pipelines from Saudi Arabia and United Arab Emirates that bypass Hormuz and have the capacity to meet close to 40% of shortage thus imposed. If you already bogged down by the possibilities, you should know that what you heard so far was just one side (supply side) of the story.

As per International Energy Agency (IEA), the developing nations led by China, Russia, India and oil producing Middle East countries will surpass the developed nations with regards to oil demand. While China and India are preferred hubs for energy intensive industries for offering subsidies, the high oil prices that have boosted the economic growth of Middle East countries will feed energy demand further. One will reasonably expect the increasing set up of refining facilities in non OECD regions to put pressure on refining margins. However, crude prices are too notorious to move on expected lines. It is naive to expect them to follow demand supply fundamentals strictly. All it will need to spur prices up will be positive economic statistics of a region's growth. All these challenges in predicting crude prices are a matter of huge concern. Especially for India. The latter being a major importer (more than 80% of the crude is imported); it emphasizes our need to be alert and proactive so as to minimize the volatilities and be prepared for what we can't control.

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