Moody oil prices will keep Modi on the edge as the second term rolls on

Crude oil tanks at Enbridge's terminal in Sherwood Park, near Edmonton, Alberta, Canada. November 13, 2016. REUTERS/Chris Helgren/File Photo

  • The first three years of the Modi administration had a windfall from the crash in global crude oil prices.
  • In 2019, the outlook for oil prices is more uncertain.
  • If crude climbs to over $80 per barrel or higher, it would have a dampening impact on investor sentiment.
India imports 80% of all the crude oil it needs and a spike in global prices wreck havoc on the South Asian economy. In the first three years of the Modi administration global crude oil prices fell to nearly $30 a barrel at one point. No prime minister in India’s history since liberalization was blessed with such a windfall.

Coincidentally, on the day that he got elected for a second time (May 23), the 1,000 point rally that Sensex was partly a cheer for Modi’s historic feat and partly attributed to a sharp 5% fall in crude oil prices that day.

However, the blessing in the form of cheap oil is not certain this time and that is something Modi's new cabinet will have an eye on throughout.

The Bitter Fruit of Trade War

Lower crude oil prices bring good tidings to the Indian economy. But the reason for their fall is a standoff between China and the US over trade talks, which brought on fears of global economic growth.

The United States and China appeared at a deadlock over trade negotiations as Washington demanded promises of concrete changes to Chinese law and Beijing said that it would not swallow any ‘bitter fruit’ that harmed its interests,” said a June crude outlook by Reliance Commodities.

Yet another surprise came this was an unexpected swell in crude stocks, while analysts were expecting a decrease. The US crude inventories also rose, their highest since September 2017, leading to last week’s fall.

All these factors have led analysts put a ‘volatile’ theme on crude outlook. “We are going to see volatility in oil markets but if we do see a big flare up in the Gulf, and I would stress this again that this is not my base case but it is a distinct possibility. That is going to be a very bad news for India and it’s going to be very bad news for investor sentiment in India,” said Alastair Newton, long-time India watcher and political analyst.

Dampening effect

Today, the crude prices had already started recovering from for their Thursday’ fall. It gained 1% reaching $68 per barrel (Brent crude). Newton believes that if Brent Crude climbs to over $80 per barrel or higher than that heads towards a $100, it would have a dampening impact on investor sentiment in India.

A rise in oil prices increase the import bill, which means India will need more dollars to buy the same amount of oil. This will weaken the rupee, reduce its purchasing power and further exacerbate inflation.

Few are even bothering to predict where crude prices will go for the next few months.

“I was speaking at a conference recently, and I did an electronic poll of about 500 odd people in the room. I gave them 4 bands for the price of Brent by the end of the year ranging from $45 to $85 and the outcome of the poll was more or less 25% for each band. It’s one of those situations where you guess is, literally, as good as mine,” Newton explained.

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