The Sensex and the Nifty is on a spree of making record highs in the month of June 2014 despite the fact that crude oil prices are on a boil. The Sensex and the Nifty reached record high levels of 25,583 and 7656 respectively in the month of June even though the crude oil prices rose due to tensions in Iraq. Escalating crude oil price remains a threat to the oil dependent economies like India with a higher possibility of rise in the Current Account Deficit (CAD). However the ramp up in crude oil production by other major oil exporting countries is expected to keep the prices at check.
Crude oil prices have shot up to a nine-month high of over USD 114 /barrel. India imports 79% of its oil requirement and higher oil prices are particularly painful for Asia’s third-largest economy. Spurt in oil prices could exacerbate India’s fiscal and current account deficits as well as further harden inflation. India is the fourth-largest oil consumer in the world and imported 190 million tonnes of oil in 2013-14. About 13% of this came from Iraq, second only to Saudi Arabia which supplies about 20% of India’s oil imports. Oil production in Iraq has not been disrupted as the violence is restricted to mostly the northern and western parts of the country. Southern Iraq accounted for more than 85% of the country’s 3.1 million barrels a day of production in April 2014 and all of its 2.5 million bpd of exports are shipped by ship tankers from the Persian Gulf.
The oil supply from Iraq has a downside risk as the anti-government forces are advancing to the capital city of Baghdad inspite of a strong resistance from the military. However, the oil supply from the Organisation of Petroleum Exporting Countries (OPEC) is expected to catch up as Saudi Arabia would pump more oil in case the situation worsens in the immediate future. Saudi Arabia is the largest producer of crude oil at 11.5 million barrels per day (mbpd) followed by Russia at 10.8 mbpd, US at 10 mbpd, China at 4.2 mbpd, Canada at 3.9 mbpd, UAE and Iran at 3.6 mbpd, Iraq and Kuwait at 3.1 mbpd and Mexico at 2.9 mbpd. There might be a temporary rise in the price of crude oil if the south western region of Iraq comes under the control of the rebels as 85% of the production happens there. The price would see a gradual fall later when other major producers begin to ramp up production.
The total crude oil production in 2013 amounted to 75.2 mbpd with Organisation of Economic Cooperation and Development (OECD) contributing 21%, Iraq at 4%, Rest of the OPEC at 36% and Rest of the World at 39%.
The United States consumes oil to the extent of 18.9 mbpd which is the highest in the world followed by China at 9.79 mbpd, Japan at 4.46 mbpd and India at 3.29 mbpd. The rise in crude oil prices is of greater significance to India and China as both the countries are expected to show further growth in consumption following growth in GDP. The other concern is of the rising import bill for India as 79% of the crude oil requirement is imported from other countries. India has the highest imports of crude oil from Saudi Arabia followed by Russia, UAE, Norway, Iraq, Kuwait and Nigeria.
The US is expected to become a net exporter of oil by 2018 as the shale oil revolution has given rise to extracting abundent oil reserves in the country. US stopping imports and becoming an exporter of oil would mean that much more oil the world has to consume. Hence oil prices are unlikely to rise to a great extent in the longer term on Iraq tensions.
The stock markets all over the world have reacted marginally negatively to the news in Iraq as oil prices rose from 107 USD per barrel to 114.87 USD per barrel in the month of June 2014. Since the production of crude oil is expected to be ramped up by other major producers mainly Saudi Arabia the rise in prices would be met with additional production in the other countries.
The crude oil prices are however not expected to decline in the immediate future as tensions are escalating in Iraq. The other risk remains is the crisis spreading to other adjoining countries in the Middle East as Syria faces the same problem in the western part of the country.
Table 1: Monthly Market Movement