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Outlook For Oil Remains Grim Despite 90% Rally

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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Rising Oil Prices May Hit Asian Consumers

For growing Asian economies, the oil price drop that started in mid-2014 was very welcome. It allowed them to cut petrol subsidies that were taking their toll on budgets and redirect funds to other sectors of the economy. Now prices are on the rise, and the subsidy cut may be starting to affect consumers.

For now, the effect is pretty moderate. Both China and India have raised retail petrol prices, though not by much. Indonesia has not yet taken such a move, but it probably will if prices breach the $50 level and stay there or continue to rise.

This is a big “if”, however. The latest rally in crude oil prices was brought about by supply disruptions in Nigeria, Libya, Venezuela, and Canada that cut daily global supply by some 4 million barrels. This, coupled with EIA’s inventory report for the week of May 20, led to an understandable reaction on the part of traders, which pushed prices higher. Related: NATO Energy Security Threatened By Karabakh Conflict

Yet the rally is slowing down already. Brent only breached the $50 barrier for a day, and on Friday, both Brent and WTI were back down into the $40s. The reasons: a stronger greenback, which makes crude oil less affordable for buyers operating in other currencies, and an easing of supply concerns.

Some observers have noted that oil prices at $50 are already dangerous for Asian consumers and ultimately for their respective economies, which have run into difficulties sustaining their growth from the last decade. In India, one observer writes, oil above $60 a barrel could put a huge spoke in the wheels of PM Modi’s growth strategy. Others, though, believe it could be a blessing in disguise, forcing the country to find new and more sustainable ways of supporting its economic expansion, instead of relying on external factors such as international oil price fluctuations. Related: Despite Oil Price Uncertainty Kuwait Spends Big On Infrastructure

In China, drivers may feel a more painful pinch as the government overhauls its oil subsidy policy. According to a report by five government agencies, released in early May, raising energy subsidies has not proved to be an efficient way of stimulating the economy. Hence, prices at the pump have been untied from the amount of fuel consumption in several sectors: public transport, fisheries, forestry, and taxi services. Now the size of subsidies will depend on the priorities of the government agency in charge of distributing them. Meanwhile, the country has been filling up its crude reservoirs, taking advantage of the price slump. The contents of these reservoirs would provide a cushion against potentially hard to deal with price rises for retail users.

There is another potential threat for end-consumers in Asia’s net oil importers, and that’s the U.S. Federal Reserve’s decision to increase interest rates. Several Fed officials have been quoted recently as saying a new rate hike is likely to take place next month or in July. This will automatically boost the dollar further and dampen the demand for crude. If that state of affairs persists and there are more supply disruptions – always a possibility in the more politically unstable members of OPEC – then things could start looking grim for Asian consumers and economies.

By Irina Slav for Oilprice.com

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  • JHM on May 29 2016 said:
    The other strategy that China is pursuing is building up an electric vehicle industry and supportive infrastructure. This offers China a more permanent alternative to subsidizing oil consumption. This EV industry will also provide China a huge export opportunity.

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