The last OPEC production cut had a silenced impact
NEW DELHI: OPEC's decision to deepen the production cut by an additional 500,000 barrels per day until March will have a silenced impact on the fiscal margin needed by the government to combat the economic wind, but a temporary increase in Pump prices.
There are several factors that will soften the impact. The production cut will be in force only for the next three months before being reviewed. This does not offer enough time for siphon Excess market supply, especially in the midst of lukewarm demand growth due to the US-China trade war and the slowdown in economic activity.
In addition, several new projects are underway worldwide, especially in the United States and Brazil, which will begin operating next year. This can replace the global oil market in Square One and, once again, reduce prices to $ 50 per barrel mark.
But most importantly, reports of Vienna where the oil ministers of the grouping and Russia met until Thursday and Friday, suggest that the additional cut of 500,000 barrels per day essentially redistributes the burden that the grouping leader had seen Saudi Arabia implement a deeper cut than its quota to compensate for member countries exceeding their objective. The current production of the group is well below the target and the last cut will reconcile the image with the stage on the ground.
These factors will surely give some comfort to the government while dealing with a decelerating economy. India is vulnerable to oil market volatility as it meets 83% of its crude oil requirement through imports. Therefore, any increase in world oil prices makes fuel more expensive for consumers and squeezes the government's ability to spend on social and infrastructure schemes, key ingredients to revive economic growth. inflation as government subsidies are exceeded and the cost of industry inputs increases. It also harms the financial and foreign exchange markets, as the increased demand for dollars to pay for oil imports puts pressure on the rupee and disrupts the current account deficit. All this depresses the feelings of the market and the appetite of the consumer, which in turn suppresses consumption. A $ 10 increase in world crude oil prices reduces India's GDP by up to 30 basis points (one base point equals one hundredth percentage point).
Oil prices have remained largely within the range this year, except for a brief increase after the missile attack on Saudi oil processing facilities in September, keeping pump prices within politically acceptable limits. However, there have been signs of an increase in recent months, but most analysts do not see a strong appreciation for a sustained period, as long as the rupee remains stable or there are no geopolitical sparks. This will see the ruling BJP through several state elections without oil raising the political temperature.