Crude oil prices are bubbling up again. The price of benchmark Brent grade crude, at $63 a barrel, has touched levels not seen since 2015 and a section of the market believes that it could climb further. The present rally that began in mid-June has seen Brent crude rise by a sharp 36 per cent from around $46 a barrel. It is pure coincidence though that the uptrend coincided with India’s shift to daily price revision for petrol and diesel at the retail level. There appear to be three main factors driving the rally. First, the revival of demand following the onset of economic recovery in the West, especially in the US, and China’s continued healthy appetite for energy. Surplus inventories quickly disappeared as demand began to outpace production from the Organisation of Petroleum Exporting Countries (OPEC). Second, the 1.8 million barrels per day cut imposed by OPEC in January this year squeezed supplies at exactly the time when demand began to revive. The third leg to the rally is the ongoing political turmoil in Saudi Arabia where Prince Mohammad Bin Salman carried out a palace coup that cleared the way for him to assume the throne in the foreseeable future. The war in Yemen and tensions with Iran are the other geopolitical factors at play pushing up oil prices.

Yet, for every analyst predicting a further rise in prices there is another to point out how the scope for rise may be limited. US shale oil producers are getting into the act now with the new rigs count steadily rising. According to US government data, shale oil output has been consistently rising since OPEC imposed production cuts, and with additional rigs being deployed, volumes are projected to rise sharply imposing pressure on prices. The International Energy Agency has meanwhile projected a steady outlook with demand expected to be soft due to a warmer-than-expected winter. It appears that prices will be capped at $65 levels and could head lower if shale oil producers start pumping away.

Policymakers in India have to, however, keep a wary eye out for a further rise in prices. Given that the country depends on imports for 85 per cent of its oil needs, a rise in prices can have serious macroeconomic consequences. Inflation could rise as will the current account deficit and the fiscal deficit as the import bill goes up. Data released on Tuesday show that the CAD widened in October largely due to a 28 per cent rise in the oil import bill and a 1.1 per cent fall in exports. Things could get difficult if the rupee weakens as a result of the widening CAD and rising oil import bill. Cutting excise duties on petrol and diesel to keep prices in check is an option but that will have an impact on the revenues and, consequently, fiscal deficit. The choices are not easy and clearly, a tough winter lies ahead for policymakers.

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