Saudi oil cut little worry for India, silver lining for explorers

Saudi Arabia’s announcement this week to cut oil production by 1 million barrels per day from next month may not have a direct impact on India’s economy but the announcement comes as a boon for Indian upstream oil exploration companies.

Jeddah announced the cuts as it aims to shore up sliding crude prices, sending prices up by 2% on Monday.

The move may not have a direct impact on India as its discounted oil imports from Russia constitute more than that of Saudi, Iraq, the US, and the UAE combined, the Economic Times reported citing data from cargo tracker Vortexa.

Russia is going against its own agreement in the OPEC+ grouping to cut oil production in a bid to keep its war machine funded and running, much to Saudi Arabia’s anger. 

Saudi energy minister Abdulaziz bin Salman said his country’s decision to cut oil production was precautionary, while adding that Jeddah would continue to hedge as long as they do not see clarity and stability in the market.

Other OPEC+ producers had agreed to extend earlier cuts in supply through the end of 2024 in a meeting held in Vienna, Austria on Sunday. 

Analysts said the Saudi move to cut oil production will not push oil prices up significantly, but will impact the global economy. 

Prashant Vasisht, senior vice-president and co-group head at ratings firm ICRA Ltd, said, “For the Indian economy, a higher crude rate would imply a higher import bill and forex outgo, besides having an inflationary impact. A higher crude price would lead to inflation in the global economy, thereby accentuating recessionary trends.”

“While production volumes have been cut, crude oil prices have been under pressure owing to weaker-than-expected demand from China and recessionary trends in several Western economies. Accordingly, the impact of these two opposing trends remains to be seen,” Vasisht said.

Oil process rallied on Monday on Saudi Arabia’s plan before calming down. Brent crude futures were at $76.58 a barrel in early Tuesday morning trade, down $1.16, or 2.04 %, after rising to a session high of $78.15 a barrel on Monday. US West Texas Intermediate crude saw a marginal decline to $71.92 a barrel on Tuesday after rising to an intraday high of $72.15 on Monday.

Harshvardhan Dole, vice-president of India Infoline Securities (IIFL), said, “Saudi Arabia’s decision is intended to keep the demand-supply equation balanced; one may also see through this move to offer fundamental support to the oil prices, which have been weak on the back of risks of economic slowdown. However, as seen from the oil price movement, such a move has had a limited impact.”

“India imports 80-85% of its oil requirements; and to that extent, the volatility in prices does have a bearing on the current account deficit and currency. The Reserve Bank of India has considered oil at $85, and the current weakness in prices bodes well from an overall policy perspective,” Dole said.

Conversely, higher crude oil prices are a boon for Indian upstream oil exploration companies such as Oil and Natural Gas Corp Ltd (ONGC) and Oil India.

“If crude oil prices increase, upstream companies like ONGC will benefit from higher realizations and cash accruals on crude oil sales. However, the marketing profits from oil marketing companies would decline or turn to losses depending upon the extent of the rise,” Vasisht said.

Dole meanwhile cautioned that “weakness in oil prices will have an adverse impact on upstream companies, provided the realizations fall materially below $75; this is because in FY23 their average realizations net of windfall tax were $75-80.”

Adi Imsirovic, a director at energy consultancy Surrey Clean Energy, told Press Insider, “Saudi’s move was ill-advised as it will isolate it into a role it did not want to be-that of a swing producer. If it does cut, all the other members, especially cash-strapped Russia, will benefit.”

“What is more, non-OPEC producers such as US shale will benefit significantly and expand their output, further eroding OPEC share,” he added

The market does not believe that it is a game-changer as prices have not rallied significantly. The reason is the lack of appetite of other members to cut, Imsirovic said.

Energy minister Abdulaziz announced his country’s stand following the OPEC+ meeting held on Sunday. OPEC+ reached a deal on output policy and decided to reduce overall production targets from 2024 by a further total of 1.4 million barrels per day. 

Abdulaziz said independent agencies will work with OPEC+ countries to evaluate production plans for 2024.