Venezuela sanctions uncertainty and high oil demand push prices back up to $80 per barrel
Geopolitical concerns that USA sanctions on Iran could curb the country's crude exports have led crude prices to trade higher in recent weeks, and the market is now weighing the possibility of additional sanctions on Venezuela following the country's presidential election, Reuters reported.
The US also toughened its stance on Iran and made a list of sweeping demands that could further curb the country's crude oil exports and boost oil prices. Geopolitical concerns, supply shocks in Venezuela, Mexico and Libya sustained production cuts despite targeted moderation of Organisation for Economic Co-operation and Development (OECD) inventories, tight demand-supply balance amid declining production and a weak dollar are some of the key factors which led to a rise in Brent crude oil price to $ 80/bbl.
Heres a new indicator for you: It seems that the difference between the price of oil here and overseas is a measure of tightness in the market, with a rising spread indicating higher prices in the future, with all the inflationary pressures that that implies. For example, the average USA household spends nearly as much money as they earn each year (resulting in an approximate 5% average annual savings rate), and the percentage of gross income spent on gasoline varies from 2-4% depending on prices, or about $1,000 per year. Brent, the worldwide benchmark climbed 0.83% to $80.11 a barrel around 8:45 a.m. ET.
The divergence is a sign of how stretched global oil supplies have become even as US output has marched higher, overtaking Saudi Arabia and rivaling Russian Federation.
All OPEC members are satisfied with the benefits of higher crude prices, according to the expert. This is what seems to be happening in oil markets now, in a febrile market volatile around a rising trend.
Among developing countries, China (with almost a fifth of global crude oil imports) and India (with 7 per cent) are particularly affected. While other large importers are all advanced countries, even developing countries that are small net importers are negatively affected because oil as the universal intermediate affects the prices of all other goods as well as many services.
The consequences for such importing countries will be manifold. An increase of 15-25% in oil prices in one year will impact the Indian economy in various ways.
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Now the market is embarking on the next stage of the cycle, with high and rising prices beginning to stimulate an increase in production, restrain fuel use, and eventually create conditions for the next downturn.
The behaviour of many oil producers and consumers exhibits a strong backward-looking component, so decisions tend to be based on where prices have been recently rather than where they are likely to go. "The government will soon come out with a solution", he told reporters. But if the effect is sought to be cushioned at least to some extent (a likelihood in an election year) then there could also be an adverse fiscal effect.
Chart 4 provides some idea of what this could mean simply for India's oil import bill.
But excess supply has now largely been mopped up, with commercial petroleum stocks at their lowest level in over three years and prices having largely recovered.
Those happy days are clearly over.
Noting that people, especially the middle-class, have to suffer due to price hike of oil, the minister said the government would try to work out a solution soon to deal with the situation.
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