Expert Analysis of the Global Macro Events & News affecting the Indian Markets

WEEKLY SYNOPSIS

Black Gold: Too Bright to Lose its Shine

Many wars have been fought and lost because of something that is as dark as night and yet is considered one of the rarest commodities available on the Earth. I’m not talking about diamonds or solitaire or any of those jewels. I’m referring to “Oil”. Often referred to as black gold, oil not only keeps our vehicles running but is also a symbol of economic might. The thing about oil is that not everyone has access to it. Only a few countries control this shimmering liquid treasure, which is why we are discussing it today.

Before starting with what is up with this commodity, I’m putting a chart showcasing prices of Brent Crude over the past 1 year. Have a look.

As you can see, Brent crude is trading at a 10-month high of $93 per barrel. In June, it was at $73 levels and this is the biggest rise of a quarter since Russia’s invasion of Ukraine. There are several reasons for the same and to make it simple, we’ll be taking up why has it suddenly soared, what it means for India, and everything in between.

So, it all started with Saudi Arabia and Russia’s voluntary oil production cuts which started the post-Russia-Ukraine war. They have extended their production cuts till the end of 2023. Saudi Arabia- 1 million barrels per day and Russia- 300,000 barrels per day. They are way too smart. Oil is one of the commodities that can force economies to bend their knees. Hence, this is done to inflate the prices over the world. 

A global economic issue and China not being a part of it, how is it that possible? This cut has also come after experts cite the recovery of the Chinese economy. Real estate crisis, deflation, and youth unemployment are expected to take a U-turn. This comes after the government has reduced interest rates and Cash Reserve Ratio (CRR)  to revive demand in the economy.

Recent data release (August)-

• After reporting deflation last month, China has finally reported inflation of 0.1% this month (left chart).
• Retail Sales, an estimate of consumer spending, increased by 4.6 percent YOY. The number has remained weak since the last few months (right chart)
• At the same time, industrial production rose by 4.5 percent year on year.

But what does China’s data have anything to do with oil cuts? Here’s the twist. China is the biggest importer of crude oil in the world and a revival in demand has pushed prices further. 

Coming up is the United States of America. The world’s number one economy, to say the least, has recently released its oil inventories. When the world is anticipating oil supply cuts, the US data says otherwise. As you can see, the chart shows an increase of 3.95 million barrels this week. An interesting point to note here is that whenever oil inventories of a country exceed expectations, it is bearish for crude oil and vice versa. After the data release, oil prices dipped slightly. 

Even though the US only imports 20-30% of its oil demand, a squeeze in supply and higher Brent prices affect consumers and the inflation numbers. The last CPI number came at 3.67% for the US, and guess what, it wasn’t the used cars or housing prices that contributed to this, it was petroleum. Petroleum contributed nearly half of it. Especially when the Fed is trying to tame inflation to its 2% target by raising interest rates, the latest price action in oil prices will be a predicament.  

US Crude Oil inventory. Source: Money control

Additionally, winter is coming in Europe and oil supply cuts could worsen the high inflation situation there. Last year, the EU went through a really bad energy crisis after Russia cut direct supply via the Nord Stream Pipeline. Let’s see how it turns out for them.

Where does India stand?

The economics of oil has always been slippery for India. India imports 85% of its oil consumption, Russia being the top importer after it started offering cheap oil post-Russia Ukraine War. India’s import of crude oil and petroleum products rose by 30% in FY23 amid heavy supplies from Russia. 

The discounts from Russia have also been shrinking. It has shrunk from $30 per barrel to $3-$4 per barrel. It’s time that India reduces its dependence on oil and finds an alternative of its own. The recent Global Biofuel Alliance at the G20 Summit held in India would aid the use of renewable energy on a bigger, global scale. Once we are completely free from the shackles of oil-producing nations that have an entire hold on the oil supply, we’ll truly become “Atmanirbhar”. 

India’s Expressway to Global Trade

Remember how a ship got stuck in the Suez Canal last year blocking the trade route for several days? That won’t be happening again. India, the Middle East, and Europe have come together to make a new route to substitute this century-and-a-half-old trade canal and pull away our dependence on it. We are talking about IMEC, the India-Middle East-Europe economic corridor announced during the G20 Summit held in New Delhi earlier this month. 

India, West Asia, and Europe are building an economic corridor to make trade cheaper and faster. This route will link India with UAE – the eastern end of the Middle East via a sea link, connect most of the Middle East from UAE to Israel with railway lines, and Israel to Europe via the sea again. Here’s what the route will look like:

source: wion

The Game-Changer for Commerce

As Biden said, “This is a big deal. This is a real big deal”. The IMEC is a big statement, both economically and politically. Giants of the modern world have come together to tackle the said villain – China and its Belt and Road Initiative, the trade route that covers a huge part of the world but leaves India out. But now, India will have smooth connectivity to Europe, our second-largest trade partner, and West Asia. The politics and economics, both are now in our favor. I’ll talk about politics later, take a look at these economic benefits first:

• 40% reduction in transit time
• Cost to be reduced by thirty percent 
• Trade exposure for middle-income companies 
• Infrastructural development – Power, connectivity, and transportation

The World against China, once again

The US-led IMEC is more than just a trade route, this, if successful will be an economic landmark for all nations involved. But, why is the US backing the corridor when it’s not a part of the route? Well, this is where the politics against China weighs in, and in this quarrel between the dragon and the dollar, the Middle East is winning. The US and Saudi have signed an agreement to lay down pipelines for transporting green hydrogen as Saudi emerges as the King with its green hydrogen resources.

What’s the next stop?

While the development of this twenty billion dollar project, the IMEC officially is to start in two months, the bricks for railways in the Middle East have already been laid. UAE is already up to speed on the railway lines with Etihad Rail has been building connectivity in UAE which will be put to use as a part of the corridor. It is going to be some time before the route is ready for trade but markets have started seeing its effect already. Adani Ports, owning the Haifa port in the gulf went up right after the announcement but growth in infrastructure is to follow in the long run. 

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Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use.