Subdued crude prices- H2 inflation outlook more stable now

Subdued crude prices: H2 inflation outlook more stable now

The upside risk to inflation from crude oil prices that persisted till early October seems to have ebbed. Analysts have revised estimates of inflation now to be around 5.4% for the remaining months of the financial year 2023-24.

Crude prices are expected to remain subdued amid concerns of sluggish demand from the top importers and tightening global supply at the same time.

“The CPI inflation print in India is showing a steady decline from 6.8% in August to 5.02% in September to 4.87% in October. Brent crude which touched a high of $96 in September is now around $82,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. “Even if the OPEC (Organisation of Petroleum Exporting Countries) goes for production cuts the increase is unlikely to be large given the sluggish global growth and the consequent poor demand. Inflation in India will be manageable.”

Analysts see the price of Indian crude oil basket at a level of $80-$95 a barrel for the remaining months of the current financial year as restricted supply is being balanced by lower demand from the US and China, the top two consumers of crude.

“Our preliminary estimate for CPI in November is at 5.5% against 4.9% in October. This is because of the base effect and a rise in vegetable prices,” said Gaura Sengupta, economist at IDFC First Bank. “Assuming petrol and diesel prices remain unchanged till March 2024, our CPI inflation for full year is projected at 5.4%.”

In Q1FY25 of the financial year 2024-25, Sengupta estimates CPI to remain above 5%.

“Global growth is subdued. At this point, (rise in) crude oil prices from demand-side (impact) is very limited,” said Anitha Rangan, economist at Equirus Group. “We may see supply side shocks coming from geopolitical tensions which we cannot predict.”

As market players await the outcome of the next OPEC meeting which has been postponed from the scheduled date of November 26, for crude prices to remain where they are or increase in the rough range of $75-$95/bbl seen in the last six months, OPEC+ will need to reduce supply going into 2024 from current levels, analysts say.

“Our balances show that total world liquids supply in the first quarter of 2024 exceeds demand by 3 million barrels a day, and although there may be stock draws in Q3, some builds are still possible in Q2 and Q4,” said Bhushan Bahree, Executive Director, S&P Global Commodity Insight. “For the full year of 2024, liquids supply exceeds demand by 1.3 million b/d in our balances.” he said.

According to S&P Global, the call on OPEC+ crude next year is seen at 35.2 million barrel per day but the group supply is set to exceed that by roughly 1 million barrels a day.

“The call on OPEC+ crude will rise through the year, peaking at 36.6 million barrels a day in the third quarter. The call is weakest in the first two quarters of 2024,” said Paul Tossetti, Executive Director, S&P Global Commodity Insights.

With a challenging demand and situation in 2024, OPEC’s decision will be very crucial for the global crude oil market in determining whether the organisation reduces supply further or risks a price reaction.

WTI crude prices on the New York Mercantile Exchange were at $75.5/bbl on Saturday, and that of Brent was at $80.6/bbl.

“West Texas Intermediate (WTI) crude prices are expected to be in the range of $70-$82 per barrel in December and are seen at a range of $65-$90 a barrel by the end of FY24,” said Manoj Jain, director, Prithvi Finmart. “Prices are expected to decrease due to shrinking demand in the US and Europe. However, rising demand from Japan and India will provide some support to prices,” he said.

Meanwhile, the country’s inflation is seen stable going ahead with the possible risk factors emerging only from food and not fuel, as per analysts.