Will crude oil hit the $120 a barrel mark in 2024?

Hyderabad: The recent disruptions in the Middle East's oil supply due to ongoing conflicts have raised concerns about their potential impact on the global economy. Fitch Ratings, in its latest Global Economic Outlook Report (GEO), underscored the possibility of higher-than-anticipated oil prices significantly affecting economic growth and inflation worldwide.

Fitch's September GEO projected an average oil price of $75 per barrel for 2024 and $70 per barrel for 2025. However, the report warned of a possible surge in oil prices, reaching $120 per barrel in 2024 and $100 per barrel in 2025. These projections hinge on supply restrictions arising from conflicts, particularly the Aeromarine disruption caused by tensions between Hamas and Israel, escalating Middle East tensions further.

IEA on the other hand differs in its predictions. According to the International Energy Agency (IEA), there may be an uptick in oil demand from 1.1 million barrels per day (mbpd) in 2024, with non-OPEC producers (Brazil, Guyana, Norway and Canada) contributing 1.2 mbpd. According to IEA, it is expected that there will be ample supply of oil in 2024 due to an economic activity slowdown combined with rising production in the US. OPEC sees an uptick of 2.25mbpd of oil production. In terms of price, support seems to be rallying around $65 (for WTI) and in the mid $60 for Brent crude if there is a global recession.

The repercussions of elevated oil prices extend beyond the Middle East, potentially dampening GDP growth across most economies. This impact could reverberate through various sectors, tightening financial conditions, dampening business activities, and lowering both consumer confidence and financial market stability.

A direct consequence of surging oil prices is the expected rise in inflation rates, particularly in countries like India, Poland, and Turkey, which might experience the highest percentage point increases. Contrarily, developed economies such as the United States might witness muted impacts by the end of 2024.

Although there is anticipation for inflation rates to correct themselves by 2025, Brazil and Mexico could emerge as outliers, facing persistently higher inflation rates in the later year. This scenario poses a challenge for central banks worldwide in their efforts to steer inflation back to targeted levels, disrupting their established expectations.

The tumultuous oil supply landscape due to conflicts in the Middle East carries substantial economic ramifications globally. The potential surge in oil prices threatens to impede GDP growth, tighten financial conditions, and elevate inflation rates across various economies. Navigating these challenges will require agile economic policies and strategies to counterbalance the impacts and restore stability in the global economic landscape.

The conflict between Israel and Hamas and the situation between Russia and Ukraine can significantly impact crude oil prices and global oil markets.

Israel-Hamas Conflict

The Middle East, particularly the Israeli-Palestinian conflict, has historically affected oil markets due to the region's substantial oil production. Tensions, conflicts, or disruptions in oil supply from this region often lead to volatility in oil prices. Any escalation or prolonged conflict between Israel and Hamas could potentially disrupt oil supply routes or production in the region, causing oil prices to surge globally.

Russia-Ukraine Conflict

The conflict between Russia and Ukraine can impact energy markets due to Russia's significant role as a supplier of natural gas to Europe. While direct crude oil supply disruptions may not be as pronounced as in other conflicts, geopolitical tensions between these countries can create uncertainty and affect energy markets' stability. Europe heavily depends on Russian natural gas, and any disruptions or geopolitical instability can influence energy prices and supply across the continent.

Both conflicts contribute to geopolitical uncertainty, leading to concerns about oil and gas supply disruptions. These uncertainties tend to influence investor sentiment, affecting oil prices and energy markets globally. Geopolitical tensions in regions critical to oil production and transportation routes often contribute to market volatility and fluctuations in crude oil prices.

India, as a major importer of crude oil, is highly sensitive to fluctuations in global oil prices, particularly when conflicts in oil-producing regions cause supply disruptions or price surges.

Here's how the Israel-Hamas conflict and the Russia-Ukraine tension could impact India:

Oil Prices and Trade Deficit

Impact on Import Bills- India heavily relies on imported crude oil to meet its energy demands. Any increase in global oil prices due to conflicts can lead to a surge in India's import bills, impacting its trade balance and widening the current account deficit.

Pressure on Fiscal Health- Elevated oil prices strain India's fiscal health by increasing its oil import bill, especially if subsidies are offered to consumers to mitigate the impact of rising prices, further impacting the budgetary allocations.

Inflation and Economic Growth

Inflationary Pressure- Higher oil prices could directly lead to increased fuel costs, subsequently affecting transportation and commodity prices, potentially contributing to inflationary pressures within the Indian economy.

Impact on Growth- Increased fuel prices can dent consumer spending and lead to higher production costs for businesses, potentially hampering economic growth prospects.

Currency and Current Account Balance

Currency Depreciation- Sudden increases in the oil import bill can lead to pressure on the Indian Rupee, potentially causing depreciation against major currencies.

Current Account Balance- If oil prices remain high for an extended period, it can negatively affect India's current account balance by widening the trade deficit, necessitating a higher outflow of foreign exchange reserves.

Policy Responses

Monetary Policy Adjustments- The Reserve Bank of India (RBI) might need to reassess its monetary policy stance to manage inflationary pressures while ensuring sustainable economic growth.

Fuel Pricing Policies- The government might need to strategize its fuel pricing policies to balance the impact on consumers while managing the fiscal burden.

Energy Diversification Efforts

Renewable Energy Focus- Heightened oil price concerns often accelerate India's focus on renewable energy sources, encouraging investments and policy initiatives in solar, wind, and other renewable sectors to reduce dependency on oil imports.

India's vulnerability to oil price shocks arising from geopolitical conflicts necessitates vigilant monitoring and policy measures to cushion its economy against adverse effects. Mitigating strategies often involve a delicate balance between ensuring energy security, managing inflation, sustaining economic growth, and minimizing fiscal imbalances.