Recession fears, soaring inflation may cool fuel prices

Following a sudden crash in crude prices, optimists are hoping that oil prices will come down in India with global prices settling at as low as $50 a barrel in view of tumbling stock markets and current recessionary malaise. A report by Narvir Rooprai

Oil has posted its worst trading day in almost three months as recession fears gripped markets. Oil plummeted by about $10 a barrel on concerns of a looming global recession curtailing demand, even with expected supply disruptions as oil and gas workers in Norway went on strike. Crude futures settled below $100 on July 6 after falling more than 8 per cent.

Prices of petrol and diesel remained stagnant across the country for the 45th consecutive day till July 4, 2022. In Delhi, petrol continued to retail at Rs 96.72 per litre, while diesel stands available for Rs 89.62 per litre. In Mumbai, one litre of petrol is priced at Rs 111.35, while a litre of diesel is priced at Rs 97.28.  It is such a grim issue that the Centre had to slash the excise duty on petrol by Rs 8 per litre and diesel by Rs 6 a litre. In a tweet, Finance Minister Nirmala Sitharaman had said that this will reduce the price of petrol by Rs 9.5 per litre and diesel by Rs 7 a litre. By the way, India is world’s third-biggest oil consumer.

Ever since the Russian invasion of Ukraine in February, oil prices have been rising, hitting $127 per barrel on March 8, 2022. But new concerns about the global economy going into a major recession have seen the price crash to below $100. There are signs of oil coming under further downward pressure in the coming days.

The pandemic led to fall in oil prices as a result of nations coming to a sudden halt. The Covid pandemic turned into another phase when the outbreak itself and the lockdowns led to a dramatic cut in demand, oversupply of oil and rapid build-up of stocks. Prices even fell to below $20 per barrel in April 2020, the lowest since February 2002 before recovering subsequently during the rest of 2020 and much of 2021.

Experts point out that there is fear lingering of another coronavirus outbreak and also oil prices have been prone to violent swings as traders fled to the exits after Russia invaded Ukraine, drying up liquidity. The latest plunge came as equities slid and the dollar surged.  There are fears that an economic slowdown will cut demand for petroleum products. Oil prices have been under pressure in the past month as central banks aggressively raised interest rates. Experts opine, “A growing number of analysts are expecting that many of the world’s leading economies will suffer negative growth in the next few months, and this will drag the US into a recession.”

There is a strong likelihood of recession that has begun to curtail oil demand.  Oil futures sank along with equities, which often serve as a demand indicator for crude, as investors fretted about the possibility of an economic downturn as central banks across the world take aggressive actions to limit inflation.

Besides recession portends, a coordinated release of additional oil from strategic reserves of major consumers such as the US, China, India, Japan and South Korea has also affected the fuel market sentiment. Major oil consumers like the US, China, India, Japan and South Korea  for the first time reacted strongly to the supply squeeze by producers’ cartel by announcing a coordinated release of additional oil from their respective reserves to cool down raging oil prices. Last year India on November 23 joined the consumers’ group against artificial control of output by the cartel, the Organisation of the Petroleum Exporting Countries  and its allies. The impact of all these factors is likely to ease oil prices.

At the same time, in South Korea, inflation hit a near 24-year high in June, adding to concerns about slowing economic growth and oil demand. Data showed growth across the euro zone slowed further last month, with forward looking indicators suggesting the region could slip into decline this quarter as the cost of living crisis keeps consumers wary. In a related development, G7 leaders agreed last week to explore the feasibility of introducing temporary import price caps on Russian fossil fuels, including oil, in an attempt to limit resources to finance Moscow’s military operation in Ukraine.

The downtrend in price may even threaten the future of OPEC as a defender of the oil cartel’s interests as members questioned the very rationale for the existence of the organisation. In April 2020, when international oil prices plunged below $20 a barrel following global lockdowns due to the Covid-19 pandemic, the producers’ cartel decided to control output. On April 12, OPEC-plus announced an unprecedented 9.7 million barrel a day output cut to check falling crude oil rates. Despite a rise in demand, the grouping did not restore supplies, which led to a spike in international oil prices.

The Centre may not cut excise duty on petrol and diesel but the transport fuel prices may still come down after a fall in global crude prices due to Organisation of Petroleum Exporting Countries and its allies’ move to raise production. OPEC and its allies have agreed to increase global oil production by 400,000 barrels per day. They are committed to restoring all of the cuts made at the beginning of Covid-19.

Nations with predominantly oil-dominated economies, particularly the Gulf Arab countries, have been found to go to any extent to protect their market shares rather than the common goals of the organisation. It is obvious that the shape of the global oil market is determined by oil monopolies, cartels and oil producing nations colluding to jack up prices artificially but recession fears are enough to bring down crude prices.

“Oil is still struggling to break out from its current recessionary malaise as the market pivots away from inflation to economic despair,” Stephen Innes of SPI Asset Management said in a note. Investors are becoming more concerned. Experts say that if the Biden administration goes to the extent of easing the restrictions on fracking, prices could even fall below $50.

Experts said increased production and lower demand due to new Covid cases will automatically lower the price of crude oil leading to a cut in pump prices of petrol and diesel in the coming days provided there is no duty hike by the government.