Resurgence of COVID

In the last few years, we have seen that as much as oil is a supply story, it is also a demand story; and perhaps more. The resurgence of COVID may not have hit the US and Europe so badly. However, oil markets worry about weak demand from India and Japan as they happen to be two of the largest net importers of oil in the world. Even assuming that Asia is able to get to grips with COVID, the demand bounce may still take time. Till then, any runaway rally in oil prices is unlikely and $70/bbl could be that price. 

Iran Nuclear deal imminent

One big story that has been putting a lid on oil prices has been the likely Nuclear deal with Iran. It could be the start of getting Iran out of sanctions and getting them on the global trade mainstream. Iran is among the largest producers of oil in the OPEC and Iranian supplies in the global oil market could make a big difference to global oil prices. At least, it will ensure that the global price of crude remains capped around $70/bbl for the time being. Iran story will also compel the OPEC to go easy on oil supply cuts. 

$70/bbl suits most countries

Crude oil operates on a strange set of economics. Global oil extractors, refiners and marketers consider a price of $70 to be reasonable in terms of gross refining margins (GRMs). If you see the latest quarterly results of Indian oil companies it is a clear case of a turnaround in the fortunes of oil profitability due to a spike in crude oil prices. Oil companies are also gaining substantially from inventory translation gains. Even from a macro standpoint, $70 has 2 key implications. Firstly, it ensures that oil is not priced for a global recession, which is normally in the range of $30-$45. Secondly, it also ensures that powerful nations of the Middle East and the Baltics are well compensated. Overall, $70/bbl is a price that suits the demand and supply side. 

Yes, it suits India too

Despite its overt reliance on oil imports, Indian economy has tended to do well when oil prices are buoyant. However, any price above $70/bbl would have been uncomfortable as the government has already skimmed most of the price fall via higher duties. With a huge fiscal deficit of 6.8% in FY22, there is little room for duty cuts on oil. The only other option would have been further price hikes on petrol and diesel, which is very unpopular and also politically sensitive. If oil tops around $70/bbl and remains in a range, it suits most nations. Yes, it suits the Indian GDP recovery too!