How OPEC+ Oil Output Cut Could Impact India — Analysts' View

The Organisation of the Petroleum Exporting Countries' decision to cut production of crude oil by 1.16 million barrels a day in anticipation of lower demand from developed economies is likely to negatively impact India in the medium to long term, analysts said on Monday.

India imports around 85% of its crude oil consumption of 4.9 mbpd. For every $10 per barrel rise in the price of crude oil, the country's import bill is likely to increase by $15 billion annually, which is around 0.51% of the gross domestic product, according to analysts.

Goldman Sachs Group Inc. lowered its end-2023 production forecast for OPEC+ by 1.1 mbpd and raised its Brent price forecast to $95 and $100 a barrel in 2023 and 2024, respectively.

The surprise cut is consistent with the new OPEC+ doctrine to act preemptively to prevent significant losses in market share, its analyst said in a note.

"Crude has seen a continuing downward trend in the later part of 2022 due to global recession fears," Debasish Mishra, partner at Deloitte Touche Tohmatsu India LLP, said.

Sentiments were further dampened in March due to the crisis in the banking system. OPEC seems to be taking preemptive action to arrest this trend, Mishra said. "This is not good for importing countries like India, which are just starting to see price stability and improving current account balance."

Vandana Hari, chief executive officer of Vanda Insights, told BQ Prime that the current production cut was significant as compared to the 2 mbpd cut that was announced last October. "The cut in October was on targets, but the current cut amounts to a supply cut by the nine participating members out of the 22-member group OPEC+," Hari said.

In the previous round, the actual supply cut was around 6,00,000 bpd. But in the current round, if the nine members are the ones who are actually producing close to their targets or above, then they can actually cut the supplies, Hari said. "If all the members adhere to the cut, OPEC+ production will go back to the September 2021 level that was at the height of the pandemic."

It is likely the Brent crude price may jump to $110 per barrel by year-end if the Russia-Ukraine crisis doesn't end soon, according to a senior analyst with a Mumbai-based brokerage, who spoke on the condition of anonymity.

OPEC and their allies, including Russia, shook markets by announcing production cuts of about 1.16 mbpd on Sunday. At its monthly meeting, it was expected to maintain its earlier decision to cut output by 2 mbpd until December. The pledges will cumulatively bring the total volume of cuts by OPEC to 3.66 mbpd, which equals 3.7% of global demand.

OPEC's share—mainly from the Middle East and Africa—of India's total crude oil imports was 71.6% in fiscal 2022 and 71.9% in fiscal 2021, according to data from Reuters. This is expected to be lower for the previous fiscal with the increase in imports from Russia after the European Union put a cap on Russian crude oil at $60 per barrel.

In October last year, Russia surpassed traditional sellers like Iraq and Saudi Arabia for the first time to take the number one spot. Russia, which accounted for just 0.2% of India’s crude oil imports in 2021–22, supplied 1.19 mbpd last December. It is about 25% of India’s total crude oil imports.

The December figure was higher than the 9,09,403 bpd of crude oil India imported from Russia in November and the 9,35,556 bpd it imported in October, according to Vortexa Ltd.