Brent crude prices continue their upward trajectory and have surged 19.5% on a year-to-date basis on the back of heightened geopolitical tensions, along with a tighter global supply-demand scenario maintained by OPEC+ allied countries. Brent crude futures had breached the $90 per barrel threshold on April 5, reaching the highest level since October.
Prices now stand around $90.84 per barrel, compared to the $75.89 per barrel at the start of the year. While higher prices were in line with expectations of stronger summer crude prices, they crossed the $90 mark prematurely, according to Amrita Sen, research director at Energy Aspects.
What Are The Factors Affecting Brent Prices?
Increased Demand
While growth is slowing, global oil demand is still on the rise, particularly in non-OECD countries.
The International Energy Agency recently revised up its 2024 demand forecast, while reducing global supply estimates downwards. The first quarter of 2024 recorded a global oil demand growth of 1.6 million barrels per day. According to its latest report, non-OECD countries dominated its outlook, with forecast demand set to rise by 1.3 million barrels per day in 2024 and 1.2 million barrels per day in 2025.
Tight Global Supply
Production hasn't been keeping pace with demand. This is on account of the OPEC+ keeping a tight grip on global supply via voluntary production cuts.
As of January 2024, Iran's crude oil production stood at around 31.6 million barrels per day, a slight from December 2023's output of 31. 7 million barrels per day. This values is also notably lower than the 43.8 million barrels per day production in 2016.
On March 3, OPEC+ countries like Saudi Arabia, Iraq, United Arab Emirates, Kazakhstan and Oman announced additional cuts of 2.2 million barrels per day, all the way till the second quarter of 2024. These production cuts removed around five million barrels a day, or around 5% of supply, away from the global market.
Scepticism of whether OPEC will stick to cuts or slowly release supply into the market will potentially be cleared on the next committee review meeting on June 1.
Geopolitical Tensions
The year has been marked by a series of geopolitical tensions, especially in the Middle East, which contributes to over one-third of global crude supply.
Prolonged matters of conflicts like the Russia-Ukraine and the Israel- Hamas wars, and the Red Sea crisis have sent Brent prices on a higher trajectory.
The latest potential trigger for prices to continue to spike is the current Israel-Iran situation that potentially threatens a shutdown of the Strait of Hormuz, a key transport pathway for global crude supply.
About 15 million barrels of crude oil flows through the Strait of Hormuz, which represents around 15% of global crude consumption.
The market is currently factoring a risk premium of $3 per barrel on account of geopolitical tensions, according to energy markets expert Vandana Hari.
How Higher Crude Prices Impact Indian Oil Companies?
Upstream Companies: Oil Producers
For upstream or oil production companies, like Oil and Natural Gas Corp. and Oil India Ltd., an uptick in global crude prices theoretically poses well. Higher crude or selling prices technically raise the revenue potential for oil production companies.
However, the windfall tax on petroleum crude that the Indian government levies limits the upside potential the upstream companies could make. The Special Additional Excise Duty or windfall tax is applied when global crude oil prices are high. The government has set a threshold price at which the tax kicks in and, thereby, targets profits made by domestic crude oil producers due to high international prices.
As of April 15, windfall tax on crude was raised 41% to Rs 9,600 per tonne from Rs 6,800 per tonne at the start of April. This marks an almost fourfold increase from the Rs 2,300-per-tonne tax levied at the start of January.
Downstream Companies: OMCs
Higher Brent crude prices potentially negatively impact the gross marketing margins for Indian oil marketing companies like Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp.
While the pump fuel prices of petrol and diesel were cut by Rs 2 per litre on March 14, it had remained unchanged since May 2022. Oil marketing companies do not continuously change fuel retail prices on a daily basis, thereby exposing gross marketing margins to the risk of higher Brent crude prices that fluctuate daily. Analysts also expect fuel rates of petrol and diesel in 2024 to be unchanged till elections.
Indian OMCs do, however, have a possible hedge to higher prices by procuring crude at discounts—something the oil marketers have been doing from Russia since 2022. However, benefits enjoyed by the OMCs have narrowed by $5.5 per barrel in nine months of FY24, when compared with FY23, according to Kotak Securities Ltd.
Price Trajectory
The trajectory of prices will be contingent on two factors: the war in Gaza and the Ukraine war, Hari said. While prices may not slip, a $100 per barrel level is not Hari's base case.
Brent prices could hit the $100 per barrel mark, but are not expected to sustain at that level, said Energy Aspects' Sen. There is spare OPEC+ capacity that countries can use in the event of extremely high crude prices, she said.
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