Crude oil prices are on the boil again. The spreading of demonstrations in Iran’s second largest city Mashhad and several other urban areas, including capital Tehran, has made investors jittery. Fears have intensified that the Trump administration in the US would not certify nuclear deal with Iran, hampering supplies from the Opec’s third-largest crude producer.
For India, it may mean a deteriorating current account deficit (CAD).
India, which imports 82 per cent of its crude requirements, takes a hit whenever crude prices push import bill higher.
Since fuel prices are not regulated anymore, oil marketing companies (OMCs) do daily revision of petrol and diesel prices, in tandem with international rates. Diesel and petrol have a combined weight of about 2.3 per cent in the CPI basket, and thus, any rise in crude prices heightens inflation concerns.
A recent report by foreign brokerage UBS suggests that a 10 per cent rise in crude prices could increase CPI inflation by around 25 basis points if the OMCs were to pass on the full increase to consumers and if there is no excise duty cut.
A $10 per barrel increase in global crude oil prices increase current account deficit by $8 billion, fuel oil subsidy by about $2 billion and dents crude oil GDP growth by 30 bps.
“In our view, if the brent price averages around $60/bbl in FY18, inflationary pressure will rise, but will still be manageable. However, oil price strengthening above $70-75/bbl could lead to terms of trade shock and increase the risk of policy rate tightening,” the brokerage said in a December note.
Mriganka Jaipuriyar of Platts said that the Iran unrest do not pose any immediate risk.
“The bigger risk is how the US will react to this unrest in Iran. President Trump has always held the view that the Iran nuclear deal was an embarrassment to the US and should absolutely be annulled. They have to certify the Iranian deal every 120 days and that deadline is approaching, next Friday, January 12,” she said.
Jaipuriyar said that if the US were to decertify the nuclear deal that would have implications for Iranian oil supplies to other parts of the world.
Iran at present is supplying close to 7,00,000 barrels per day of crude oil to Europe.
“Even if the EU decides not to be part of this removal of — the cancellation of the nuclear deal European companies may not want to take the risk of being barred from the US financial system,” Jaipuriyar said.
In a tweet on Wednesday, the US President Donald Trump said: “Such respect for the people of Iran as they try to take back their corrupt government. You will see great support from the United States at the appropriate time!”
Such respect for the people of Iran as they try to take back their corrupt government. You will see great support from the United States at the appropriate time! Read More