Key factor what is keeping our markets on tenterhooks is simmering crude oil prices. Crude started the year are slightly over USD 60 A barrel and touched USD 85 A barrel as of yesterday. A 40% Spike, & to add insult to injury is Rising Dollar. Or rather it’s a Catch 22, USD is High coz of High Crude Oil Prices.
Pure Economics:- Higher Crude Prices leads to more dollar out flows than inflows.
PIC1:- Benchmark Brent Crude Oil Prices:- last 5 Years Price Trending ( USD/ Barrel)
Why is Crude rising?
1. Perceived impact of US sanctions on Iran. Starting Nov 2018.
2. Troubled Libya, Continuous Infighting. Venenzuala – economy remains in shambles and its is one of the major contributors of oil production.
So problem is here:- Diminishing OPEC supply. Trump has repeatedly asked Saudi to ramp up supplies. But with sanctions on Iran round the corner, expect it to further dip.
PIC 2:- OPEC Supply (Organisation of Petroleum Exporting Countries)- Trends of Last Few Quarters.
OPEC has 15 countries, & Accounts for an estimated 44% of global oil production and 81.5% of the world’s “proven” oil reserves,
World Energy Demand Supply Equation (Million Barrel Per Day):-
From Q2-2017- Global Oil demand Started Outstripping Supply, hence Prices started firming.
Gap Narrowed in First 2 Quarters of 2018 ( Calendar Year), and in 2nd Quarter 2018, Oil Production was neck to Neck with demand.
Everything is in perfect harmony, But again, Trump has a role here, He is placing Sanctions On Iran, Which Produces approx. 4 Million BPD and exports 2.5 MBPD. With sanctions coming in place from 4th Nov 2018, Iran Exports slumped to 1.7 MBPD in Sept 2018 and is expected to fall further, Trump wants it to be ZERO, But lets say it comes down to 1MBPD, as it was under sanctions in Obama’s regime, Still it will lead to massive supply gap and with other OPEC countries doing little to ramp up supplies.
PIC3:- World Energy Needs:-Demand / Supply Equation.
Rising Dollar:- Jan price INR 63.85 and INR 74.12 as on 5th Oct 2018. A spike of 16%, unbearable.
Boiling Crude oil price is the Key reason. Simple Economics Dollar Outflow is more with higher crude.
As per Nomura:- For every $10 per barrel rise in the price will impact India’s fiscal balance by 0.1% and current account balance by 0.4% of GDP.
Foreign Investor are pulling out as well, coz with Stable US equity Markets and rising US bond yield, US becomes an attractive destination for them.