Oil rises 16% YTD: How will the fresh spike impact India and world markets?

The International Monetary Fund (IMF) has described an “adverse scenario” in which an escalation of conflict in the Middle East would lead to a 15 per cent jump in oil prices and higher shipping costs that would hike global inflation by about 0.7 percentage points. Global brokerages such as Morgan Stanley has lifted its third quarter Brent crude oil forecast by $4 per barrel to $94 . 

Also Read: Iran’s crude oil output up 20% in 2 years at 3.3% of global supply: What does this mean for the Iran-Israel proxy war?

Oil was last above $100 in 2022. It briefly spiked to around $139 after Russia invaded Ukraine, its highest since 2008. The tightness in oil supplies, and higher prices, has been underpinned by oil producing group OPEC and other big oil producers curbing their output. With oil prices expected to stay high, here’s how the fresh spike will impact world markets:

How will the rise in oil prices impact world markets?

Inflation: Softening energy prices have been a principal driver of lower inflation expectations recently. Higher oil prices are seen as a threat to this trend. The latest US inflation print has cut back hopes of an early rate cut by the US Federal Reserve. Coming to Europe, the European Central Bank (ECB) has a two per cent inflation target.

ECB chief Christine Lagarde said that fresh turbulence in the Middle East had so far had little impact on commodity prices. Oil, while near recent highs, has eased a little this week. Still, the ECB has said it is “very attentive” to the impact of oil, which can hurt economic growth and boost inflation.

Zurich Insurance Group chief markets strategist Guy Miller said economies can survive, and producers are reasonably happy, when oil is around $75-$95 a barrel. “But were we to see this to break higher then, yes, that would be a concern both from a growth and inflation perspective,” he said.

Also Read: Oil traders stay bullish as Brent hovers at $90: ‘Crude to stay elevated even if Middle-East tensions cool down’

Stronger Dollar: 2024 kicked off with expectations the dollar would decline as inflation weakens and allows the Federal Reserve to start cutting rates. Instead, the greenback is up 4.7 per cent this year as rate-cut bets are slashed.

Higher oil prices could feed dollar strength. Bank of America said that while it remained negative on the dollar over the medium term, elevated oil prices meant the US currency had “upside risks”. This puts pressure on economies such as Japan battling currency weakness, keeping traders on their toes over possible intervention to support yen which is struggling at 34-year lows.

Pressure on EMs: Higher for longer oil prices will also pinch many emerging market (EM) economies, such as India and Turkey, that are net oil importers. India’s rupee hit record lows against the US dollar this week. With oil priced in dollars, many importers are also exposed to higher prices caused due to the currency fluctuations.

How will the rise in oil prices impact India?

India – a net importer of crude oil which fulfills as much as 85 per cent of its energy needs through imports, is likely to see a heavier import bill if global crude oil prices keep rising throughout the year.  The country’s crude oil import dropped 16 per cent in FY24 as lower international rates but the dependency on overseas suppliers rose to a new high, official data showed. 

Also Read: India’s trade deficit to hit $276 billion in FY25? Here’s how $10 rise in oil prices will impact economy

India imported 232.5 million tonnes of crude oil, which is refined into fuels like petrol and diesel, in the 2023-24 fiscal (April 2023 to March 2024), almost the same as in the previous financial year. But it paid $132.4 billion for the imports in FY24 as against $157.5 billion import bill in 2022-23, oil ministry’s Petroleum Planning and Analysis Cell (PPAC) data showed. 

The world’s third largest oil importing and consuming nation has been able to add to its domestic production drop, raising its import dependence. The import dependence of crude oil soared to 87.7 per cent in 2023-24, up from 87.4 per cent, according to PPAC. 

However, economists say that even amid high international crude oil prices, India should be able to keep its import bills for crude oil under check in the near-term, due to the decent supply from the Russian crude oil imports.

Hardik Shah, Director, CareEdge Ratings said, “The crude prices were on an increasing trend since the start of calendar year 2024. In-spite of the decline in crude price in the last one week, we expect an upward bias in crude prices in the near term. ‘’

‘’But in case situation worsens between Israel and Iran, it may lead to spike in crude prices. However, India still has a decent share of supply of Russian crude which comprises of 30 per cent of India’s total imports by end FY24, and it should help to keep India’s import bills for crude oil under check,” added Shah.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

Milestone Alert!
Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!

Published: 19 Apr 2024, 09:36 PM IST