COMMENTARY – Has Modi’s luck with oil run out?


When Indian Prime Minister Narendra Modi first came to power five years ago one of the high points was his extraordinary luck with oil prices, which nearly halved within a space of a few months.

But that luck may well run out in his second term due to conditions not in his control, creating critical fiscal issues given India imports a large chunk of its energy needs.

Following coordinated output cuts by the Organisation of Petroleum Exporting Countries (OPEC), oil prices rose by more than 30% between Jan-April, before cooling by 10 % in May amid fears of global demand falling as a result of the US-China trade conflict.

However, since Modi’s second five-year term began last month, signs are that oil’s rally this year is set to resume.

After dilly-dallying for weeks, OPEC plus members including Russia have agreed to meet on July 8-12 to possibly extend production cuts to the second half of the year.

US President Donald Trump, who until recently was fulminating against China’s trade policies, is suddenly exuding optimism about trade talks with Beijing slated for the end of the month at the G-20 summit.

If all that were not enough to spark bullishness on oil, a spate of attacks on tankers and oil facilities at the Straits of Hormuz — a shipping lane for 20% of global oil supplies—looks like it could escalate into armed conflict between Iran, the US and possibly Middle East majors like Saudi Arabia.

Under US pressure, following the end of sanction waivers on Iranian oil sales since May to 8 countries, New Delhi’s oil imports from its fourth-largest supplier is set to drop to zero in coming weeks — particularly bad as Teheran offered discounts on oil sales.

The squeeze on oil supplies to India have turned worse due to US sanctions on another key oil supplier, Venezuela, which are being enforced to bring about a regime change. However, the nation remains in a political deadlock, which means a resumption in normal oil supplies are at least months away.

Expectations are that Brent crude prices will rise to $70/barrel from current level of around $60 in the third quarter of the year. Technical charts also point to a rebound soon in oil prices.

A point of relief could be that US oil production has surged to record highs, which means they can export to India. However, Indian refineries are not geared for the light, sweet grades of shale oil and more equipped for heavy Middle Eastern and Venezuelan grades.

India’s oil demand is already showing worrying signs. Imports in April dipped on year and were nearly flat in May. Slowing automobile sales partly reflect worries about fuel prices.

Amid worries about an economic slowdown and a patchy monsoon season, oil prices could bite deeper as farmers need diesel to run water pumps while industrial demand is also substantial.

Since 80 percent of India’s oil demand is imported, higher oil prices could not only cramp room for government welfare programs for farmers, but also drive up  inflation and limit room for bank rate cuts needed to stimulate a slowing economy.

Modi will need a lot of luck to swing oil markets back India’s way.

Bandini Chatterjee, the columnist, is an independent analyst focusing on the ups and downs of the commodity markets.

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