It was a case of another day, another dollar for the oil market on Thursday as the two leading crude markers approached multi-year highs. Brent topped $76/bbl for the first time in two weeks while WTI edged towards the $74/bbl mark. The latest advance came as oil bulls basked in the supportive afterglow of Wednesday’s positive US inventory numbers. Further bullish impetus came courtesy of a softer greenback. The dollar index dropped to a one-month low yesterday after the Federal Reserve kicked the tapering can down the road at its latest policy meeting.
Meanwhile, US stock indices bounced to record highs. Sentiment was buoyed by a slew of strong corporate results, easing virus concerns and solid US growth data. The US economy grew at an annualised rate of 6.5% in the second quarter, far less than the 8.5% growth forecast by Wall Street and barely up from the 6.4% rate seen in the first quarter. However, while it may have undershot expectations, the good news is that the world’s biggest economy has now surpassed its pre-pandemic-level. All the while, separate data showed that initial claims for jobless benefits fell by 24,000 to 400,000. More of the same is expected in the coming weeks as fiscal stimulus and the ongoing vaccine rollout continues to fuel US economic growth.
At long last some good news for India. The country’s brutal second Covid wave that began in the spring appears to have been brought under control. New daily cases have fallen to around 40,000 from over 400,000 in early May. This has allowed for an easing of restrictions across the country, which in turn has spurred a recovery in mobility. Preliminary data points to a rebound in fuel demand last month. Consumption rose by 8% in June from May in what was the first monthly increase since March.
India can finally see the light at the end of the Covid tunnel. But just as one concern eases, another rears its ugly head. The concern now for India is rising oil prices. The Asian powerhouse imports around 84% of its total crude needs, making it especially vulnerable to global crude prices. Small wonder, then, why India has been the most vocal critic of the OPEC+ production reduction pact this year. The price hawk has expressed concern that the higher crude and fuel prices in India would slow down the economic and oil demand recovery.
Yet despite the latest decision by OPEC and its non-OPEC allies to boost supply, Indian consumers are still facing the heat from rising crude prices. The retail selling price of petrol and diesel has shot up to records highs. And more price pain lies on the horizon. Crude prices are set to get more expensive over the coming months with a rise in global demand and falling global inventory levels.
Given the situation, India’s newly appointed oil minister revealed this week that it had asked crude oil producers, including OPEC, to price oil at reasonable rates and to provide better commercial terms like enhanced credit period. What’s more, it looks to set to take a page out of China’s playbook. China is widely believed to have tapped into its strategic petroleum reserves in a bid to sell lower-priced crude to its refiners amid rallying international oil prices.
In a bid to also mitigate the impact of high oil crudes, India is reportedly considering selling half of its strategic petroleum reserve. India’s move to commercialize half of its SPR is primarily aimed at raising financing to expand its strategic storage capacity, but it could also ensure cheaper oil from storage to Indian refiners. However, such a move risks further depressing already low crude imports. India’s intake of foreign crude fell to an eight-month low in June as fuel demand fell sharply in April and May following the introduction of restrictions to curb a second wave of coronavirus.
Thankfully, India’s oil demand is recovering as the Covid situation in the country has improved. Yet while its demand outlook for the remainder of the year looks encouraging, that is not to say that its crude imports will rebound significantly from current low levels. Higher oil prices coupled with the looming drawdown in strategic stocks will displace crude oil imports of the world’s third-biggest crude importer. Needless to say, this represents a red flag for the demand side of the oil coin. India has long been one of the stalwarts of global oil demand growth. And its softening crude import outlook will be a cause for concern among those fretting over the fragile oil demand recovery.