Crude Oil Prices are on the rise. Brent Crude has hit $75 a Barrel. Analysts are predicting a rise in Crude Oil prices to $80-85 a barrel. Take a look at this. Crude Oil Prices were around $54 a barrel in December 2018. Now they could be heading to $80 a barrel. This begs the question. Why are crude oil prices rising?
The US has imposed sanctions on Iran and has vowed to bring Iran’s oil exports to zero. Crude Oil prices hit a 5-month high after the Donald Trump administration decided not to extend the waiver granted to India and 7 other countries on Iranian oil imports beyond May 2nd 2019. The US has warned these 8 countries that they could face sanctions if they don’t stop importing Iranian Crude after May 1st 2019.
The US unleashed the toughest ever sanctions against Iran, an oil-rich nation in November 2018, for abandoning the 2015 Nuclear Deal. The US targets both Iran and all states which trade with it. This move has affected Iranian exports, shipping and banks, which is essentially the core of the economy.
The US aims to curb Iran’s nuclear ambitions. Basically, USA doesn’t want Iran to build a Nuclear Bomb which threatens Israel and other countries nearby. US wants to stop cyber attacks, ballistic missile tests and support for terrorists and extremists in the Middle East, which it claims originates from Iran. Iran has stated that its nuclear program is strictly for peaceful purposes.
The US had granted exemptions till May 1st 2019 to 8 countries importing Iranian Crude. Italy, South Korea, Japan, Turkey, China, India, Greece and Taiwan are the 8 countries who have been granted this exemption.
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The US imposed sanctions on Iranian Crude Oil way back in 2018. It however granted 8 countries an exemption to this rule. This was just for limited purchases. This exemption will expire on May 2nd and US will not extend the waiver. This would cut 1.3 Million Barrels of Crude Oil from global supply. OPEC has also cut production, pushing oil prices higher.
Iran is a founder member of OPEC or Organization of the Petroleum Exporting Countries. OPEC was founded in Baghdad, Iraq with the signing of an agreement among 5 countries. These are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. These countries became the founding members of OPEC. OPEC currently has 14 member countries.
The purpose of OPEC is to ensure efficient, economic and regular supply of petroleum to consumer nations like India and China. There’s also steady income to producer nations like Saudi Arabia and high return on capital for those investing in the oil business.
Iran is an energy superpower. It produced 5.1% of the World’s total crude oil in 2004. The country earned around US$30 Billion which was the primary source of foreign currency. Iran ships most of the Crude Oil to Asia, Europe and Turkey. China and India are its largest consumers.
Iranian oil exports fell to 1.08 Million Barrels a Day in November 2018. This was a fall of almost 1.34 Million Barrels a Day since May. This was the time US withdrew from the Iranian Nuclear Deal. Since November, volumes have gone up by a whopping 60%. Iran is exporting Crude from its storage. China, India, South Korea and Japan remain the largest consumers of Iranian crude.
US curbs are not good news for India as it’s a key importer of Iranian Crude. Indian stocks crashed after US decided not to extend the exemption. FIIs have invested heavily in Indian stocks in the past few months. If Crude Oil prices go up, FII flows in Indian stocks will come down.
India imports 80% of its crude oil needs. A rise in crude oil prices is bad for the Indian economy. Every $10 rise in crude oil prices increases India’s CAD (Current Account Deficit) by 0.4% of GDP. Fuels have a high weightage in the CPI inflation index. (This is a 2.3% weightage in the CPI). A 10% increase in Crude Oil Prices pushes up inflation by 20 basis points. RBI may go for a repo rate cut in June. If CAD and inflation goes up, the RBI would think twice on a repo rate cut.
If Crude Oil Prices go up, it affects working capital needs, operating costs and also raw material costs of Companies like automobiles, chemicals, consumer staples, lubricant manufacturers and paints.
A rise in crude oil prices increases the demand for dollars. This is bad for the rupee. This hurts rupee-dollar exchange rate. A weak rupee lowers foreign investor interest in the Indian markets. India becomes a poor investment destination.
India may stop importing crude oil from Iran and increase imports from Saudi Arabia.
Iraqi crude can help meet global oil demand over the next decade. Iraq could add 1.2 Million Barrels per Day through 2030. Iraq is OPEC’s second largest oil producer.
OPEC could raise output, but this may not be sufficient to match global oil demand. Rising US oil exports could keep crude oil prices low. The US exports petroleum to 180 countries, the largest markets being Mexico and Canada. The US could produce more than 24 Million Barrels a Day of oil and other liquids by 2025. Booming US Oil and Gas production could propel the US past the combined output of Russia and Saudi Arabia, in the next six years.
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