Why is crude rallying so hard?   

In a way, it is a tad ironical. Headwinds are not too encouraging for crude oil. The Omicron was expected to compress demand by cutting economic activity. In addition, the big shift to green energy was to reduce the lure of oil. In the midst of this uncertainty, crude is at a 7-year high and analysts are penciling in Crude at $100/bbl if oil traders also start building aggressive long position in oil futures. But, why is crude in the midst of such a frenetic price rally globally? 

For the last 7 years, the fall in oil prices was due to a pitched battle between the US and the OPEC. Both have realized the futility of keeping prices too low, especially after the fat tail event of oil going into negative in April 2020. Today, oil supplies are being better coordinated such that the demand is consistently at a level above the supply. Most of the oil consumers are still enjoying the lag effect of last 7 years, so they are OK. Oil producers are certainly a happy lot. Above all, robust oil prices gives the hope that the world economy is growing and that keeps global markets happy. There is no urgent need to change this. 

India has a problem on hand

India still relies on imported crude for more than 85% of her daily needs. That makes Indian economy vulnerable to oil price spikes. Since the start of Dec-21, the price of Brent crude has rallied 27% and shows no signs of relenting. Every $10 spike in crude increases inflation by 47 bps and fiscal deficit by 43 bps. That is why, oil prices have a negative impact on India. Unlike other economies, India did not create any war-chest out of low oil prices. Most gains were skimmed out by the government in the form of higher excise duties. That is what makes India more vulnerable to a spike in oil prices. 

Real risk is about green plans 

Normally, when oil prices are too low, investments in green energy are not viable. That is why you see a flurry of green investments happening when oil prices are at higher levels. However, the current levels of fossil fuels pose a quandary. The prices of oil are high enough to allow oil companies to focus more on fossil fuels A it is likely to spin a lot of profits at these prices. This is likely to reduce their thrust on green energy. The longer the oil prices stay in this equilibrium, oil companies have less incentive to invest heavily in green energy. The longer oil prices stay at these levels, it is more likely that big oil companies will get complacent about the situation. Green energy may take much longer to go fully mainstream!