Global oil market dynamics are shifting in favour of India’s energy plans

First, a look at oil prices. They had averaged about $50 a barrel from 2015 to just before the pandemic that began in 2020. They plunged in the wake of global lockdowns to the teens, briefly even turning negative. This paradoxical ‘negative price’ arose because supply gluts in certain places (like Cushing, Oklahoma, US) were so great that prices reflected an incentive for operators to pick up the oil at those locations and prevent the commodity from overflowing all available on-land and tanker storage capacity. 

Oil prices recovered to a more normal $50-60 going into 2022, when the Ukrainian war and resulting economic sanctions against Russia caused prices to a jump to $120 a barrel and settle down at an average of about $80, which is roughly where they are today.

Also read: India’s CAD reduces to 0.7% of GDP, records surplus of 0.6% in Q4: RBI

There appears to be a $15-20 per barrel uncertainty premium baked into the price of oil. The oil price volatility index, which measures the variability of prices, reached an all-time high of 226 during covid and stayed elevated in the 40s till recently (a reading of 30 or below is seen as normal).

The Organization of Petroleum Exporting Countries (Opec) along with Russia, together called the Opec+ countries, have kept supply tight, partly contributing to the high price of oil since 2022. High prices have provided ‘windfall’ profits to many companies that are in the business of pumping oil. Businesses have followed a strategy of returning some of that money to shareholders through buybacks and dividends, but also are reinvesting a portion in increasing capacity. 

According to a recent report by the International Energy Agency (IEA) that focuses on the long-term oil demand-supply balance till 2030: “World oil production capacity, led higher by the United States and other producers in the Americas, is forecast to outstrip demand growth over the 2023-2030 forecast and, barring the covid pandemic period, inflate the world’s spare capacity cushion to unprecedented levels." 

Total supply capacity is expected to rise by 6 million barrels per day (mb/d) to 113.8 mb/d by 2030, a staggering 8 mb/d above projected global demand of 105.4 mb/d. In product terms, there is a steady shift towards natural gas liquids (NGLs) and condensates. 

The IEA expects half of the increase in supply to be in NGLs, with most of it coming from the US and Saudi Arabia. Guyana will become the newest petrostate, with oil production going from zero to over 600,000 b/d in a few short years.

Also read: ‘Crude’ impact on economy: $10 rise in Brent widens India’s CAD by 0.5%, say analysts as oil sizzles to 10-month high

Structural demand factors are also changing dramatically in geographical and product terms. The locus of demand growth had already shifted eastwards, a shift that began with fast-swelling Chinese demand about 20 years ago and now includes India’s. As seen after the sanctions against Russia, this shift has important implications for oil trade flows and overall market dynamics.

The IEA forecasts that overall demand will peak this decade. As a market forecaster, Goldman Sachs expects the peak to occur a bit later, in 2034, based on the pace of EV adoption, uncertain growth of China and impact of rising incomes on emerging-market demand. It predicts that “the thirst for oil will be driven by increased demand for petrochemicals and specialized refined products like jet fuel, rather than gasoline."

Oil prices are notoriously difficult to predict. However, long-term structural factors directionally indicate a slowing and eventual peaking of demand. Supply factors will, of course, respond to this long-term path. Taken together with the elimination of the uncertainty premium embedded in today’s oil prices, it seems plausible that average oil prices in the latter half of this decade will drop closer to the $40-60 per barrel range.

This scenario augurs well for India, which looks likely to have a positive growth rate of oil consumption for another 20 years or more. Today, a $10 change in the average crude oil price changes India’s net oil imports by about $12-13 billion, which makes up about 0.3% of the annual current account deficit (CAD).

The shift to petrochemicals is also beneficial to India, since it is a net exporter of these products and has established some of the most modern refinery complexes in the world. While the oil bill and the consequent pressure on India’s CAD is likely to be lower in the years ahead, it can provide a cushion to accelerate the country’s green-energy transition in parallel.

Also read: India’s oil import bill could rise to $101-104 billion in FY25, says ICRA report

A $20 average fall in the price of oil for a five-year period starting from 2025 would result in annual savings of about $25 billion. Over a five-year period, that would amount to well over $100 billion. This transformation of ‘savings on oil’ to ‘investing in clean energy’ will require a clear-headed and far-thinking strategic plan.

P.S: “Plans are useless, but planning is indispensable," said Dwight D. Eisenhower.