Oil prices fell in early trading on Monday, pulled down by rising economic concerns in Asia and a related strengthening in the U.S. dollar, which makes fuel imports for countries using other currencies more expensive.
International Brent crude oil futures fell back below $50 per barrel. The dollar has recovered some 1.3% from June lows against a basket of other leading currencies, pushed by the prospect of a potential hike in U.S. interest rates and by concerns over Asia’s economy, which is dragging currencies there.
But the main concerns in oil markets was Asia’s darkening economic outlook.
Japan’s business survey index (BSI) of sentiment at large manufacturers stood at a negative 11.1 in April-June, compared with minus 7.9 in January-March, according to a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.
There are also worries about growth in China, largely due to industrial overcapacity and spiralling debt.
With Asia’s economic growth outlook darkening, many oil speculators have sold out of long positions which have been profiting from an almost doubling in crude prices since hitting over decade lows earlier this year. This selling shows the oil market may not be sustained at $50 a barrel.
A volatile commodity, crude prices this year have been impacted by the persistent news of production freeze by the oil producing countries and also a slowing Asian economy led by concerns in China and Japan.
The Indian government has maintained that their Budget math and inflation calculation will not be impacted till oil prices remain range bound within $40-$60 a barrel.
The slump in oil price is one of the factors that has helped Indian economy notch up big gains by cutting its import bill, saving foreign exchange and reining in inflation.
India depends on imports for meeting 80% of its oil needs. The country spent $63.96 billion on crude oil import in 2015-16, about half of $112.7 billion outgo in the previous fiscal and $143 billion in 2013-14. For the current fiscal, the import bill has been pegged at $66 billion at an average import price of $48 per barrel.
Experts also predict a range bound crude prices. “Unless Iran decides to freeze production oil prices are likely to be range bound. Oil prices are likely to hover around $35 to $45 a barrel” says former oil secretary, S C Tripathi.
Former chairman and managing director of ONGC, R S Sharma points out that, “The world is producing 1.7 million barrels extra per day. So there has to be a drastic production cut, otherwise oil prices will remain range bound.” In other words, we are living in a world where oil production is plenty but the need for it is much lower.