The surprise cut in crude oil production by the Organization of Petroleum Exporting Countries (OPEC) on April 2 has shocked commodity markets worldwide, with Brent crude prices climbing $5 a barrel. Brent crude oil was trading at $85.63 a barrel on April 4. OPEC’s decision to cut 1.16 million barrels of oil per day to shore up prices has put the world economy, which is already looming under the threat of a recession, in greater uncertainty.

India, which imports 85 per cent of its crude oil requirement, will be impacted in a big way if crude oil prices move further up—as predicted by some agencies—into the $95 a barrel price zone. It will make fuel costlier for citizens and widen the current account deficit (the country’s higher expenditure compared to its receipts), putting further pressure on the rupee and stoking more inflation.

Both Saudi Arabia and Russia, two of India’s largest suppliers of oil, have announced an oil production cut of 500,000 barrels a day till the end of 2023.

OPEC termed its move as “precautionary” and aimed at “supporting the stability of the market”. Oil prices have been depressed towards the end of calendar year 2022 as China, the world’s largest crude oil importer, reduced its imports due to a complete shutdown of some cities as part of its zero-Covid policy.

Oil prices also tumbled on fears of an impending recession in many parts of the world. But in 2023, prices rebounded as China opened up fully and the immediate threat of a global recession was off the horizon, only to fall again in recent weeks.

Brent crude prices had fallen to as low as $19 a barrel in April 2020 as the pandemic hit the globe. Prices remained depressed for some time before recovering in the later months and then soaring to as high as $124 a barrel in March this year. Since then, prices had been on a downward spiral, falling to $72.77 on March 17. This has prompted the OPEC action.

OPEC is the single biggest influencer of oil prices. The group is made up of 13 countries—Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates and Venezuela. Together they control 40 per cent of the world’s oil supply. Nearly 80 per cent of the world’s proven oil reserves are located in OPEC member countries, with the bulk of OPEC oil reserves (64.5 per cent) in the Middle East. Given its huge influence over oil production and supply, OPEC, which was founded in 1960, has a major command over the pricing of oil. By restricting production, the cartel could force a price rise, helping member countries reap big profits.

Apart from demand and supply, oil prices are also determined by the sentiment towards oil futures contracts, which are traded heavily by speculators. Another determining factor is the cyclical trends in the commodities market.

In the latest move, Saudi Arabia has agreed to cut production by 500,000 barrels per day, Iraq by 211,000 barrels, United Arab Emirates by 144,000 barrels, Kuwait by 128,000 barrels, Kazakhstan by 78,000 barrels, Algeria by 48,000 barrels, Oman by 40,000 barrels and Gabon by 8,000 barrels, starting May until the end of 2023. Russia, which is part of the ‘OPEC Plus’ nations, announced a production cut of 500,000 barrels per day of crude till the end of 2023.

India imported 171.9 million metric tonnes (mmt) of crude oil in the April to December period of FY2023 at a cost of $125.5 billion, up from 156.5 mmt at a cost of $82.6 billion during the same period in FY2022. The consumption of petroleum products during April-December 2022, with a volume of 164.87 mmt, reported a growth of 10.5 per cent compared to the volume of 149.16 mmt during the same period of the previous year. Petroleum imports as a percentage of India’s total imports, in value terms, stood at 29.7 per cent in the April-December 2022 period.

Ever since the war with Ukraine, Russia has emerged a big supplier of crude oil to India, as the latter benefited from Russia’s cheaper oil. Russia overtook Saudi Arabia as India’s top crude supplier for five consecutive months, from October 2022 to February 2023. Media reports quoting energy tracker Vortexa said that Russia provided 1.26 million barrels per day (bpd) of crude to India in January, and 1.62 million bpd in February. Imports from Russia in February were higher than India’s combined imports from both Saudi Arabia and Iraq, reports added.

Russia held a 35 per cent share in India’s import basket as of February. Russia diverted its oil supply to India and China at discounted prices after the European Union and the US imposed a slew of sanctions against it. India is said to have saved Rs 35,000 crore by importing cheap Russian crude since February last year. Moreover, there are few places that Russia can export its oil to after the recent price caps set by the western countries on Russian crude oil.

However, the present rise in crude oil prices could put India in a tight spot, as discounted supply of oil from Russia alone cannot be a buffer for it against the headwinds of slowing merchandise exports, a weak rupee, high inflation, and a widening current account deficit. It also jeopardises any hope that the government would cut fuel prices anytime soon, leaving the man on the street high and dry.