Crude shock: Road ahead for India

The global economy may face one of the largest oil supply shocks in history. Russian oil exports have fallen since the country’s invasion of Ukraine. If sustained, sanctions imposed by the United States and other western nations could lead to a drop in seaborne Russian oil amounting to 3 million barrels per day, which would be the sixth-largest disruption since World War II, according to the strategists in Goldman Sachs Research.

Though India will not be impacted directly as Russian supplies of crude account for a very small percentage, the rising prices around the globe amid the Russia-Ukraine conflict need to be controlled as they are making raw materials across sections and food costlier and exerting pressure on public finances. A sustained rise in commodity prices can lead to further depreciation of the rupee against the US dollar and adversely impact the investment climate and the most precious capital flows to the country at a time when the government has begun massive infrastructure upgradation which requires an estimated Rs 100 lakh crore. Since India heavily relies on oil imports, the skyrocketing prices can impact the purchasing power of its households. Food prices will go up in tandem with transportation costs. All of these will have a cumulative bearing on inflation as almost half of the retail prices inflation index consists of food prices. Rising inflation could pinch the pockets of a large section of people and lead the Reserve Bank of India to rethink its current pause on the interest rate moves.

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India is a major buyer of Russia’s sunflower oil. Nearly 10% of domestic edible oil consumption is sunflower-based, of which 90% is imported from Russia and Ukraine. Given that the domestic oil mills carry an inventory of 30-45 days, escalating tension will have a bearing on edible oil prices. A spillover impact is seen on other edible oil rates too. Mustard and palm oil prices have again soared after a brief respite. The hope that a new mustard crop in March could cool oil prices is slowly fading. In line with oil prices, freight rates too are moving up. Trade associations said container costs have moved up 10 times since the conflict began, and war insurance premiums rose 5%. Gas prices are another victim of the conflict between the two countries. India imports 2.5 million tonnes of LNG every year from Russia’s Gazprom. Spiralling crude can dampen construction work through rise in costs of coal, steel, aluminium and copper among others. Prime Minister Narendra Modi’s flagship affordable housing scheme may no longer be as affordable. Transportation accounts for 20% of the total construction costs. This, together with soaring raw material prices can delay under-construction projects and escalate costs.

The automobile industry, which has been impacted for a long time now, may not see the sunny side anytime soon. Mobile phones, consumer electronics and many others, which rely on microchips for production, will have to face huge shortages. Palladium and neon are the two resources important in the production of these chips. Russia accounts for a little less than half of the global palladium supplies, Ukraine supplies three-fourths of the globe’s neon, key ingredient for making chip. According to a Moody’s Analytics report, the markets can expect the global chip shortage, which began with the pandemic, to worsen if the military conflict lingers on. Neon prices went up many times during the 2014-15 Russia-Ukraine war. Moody’s said though chip-making companies have stockpiled resources since that shortage and due to the elevated demand during the pandemic, if a deal is not brokered soon, the chip shortage will get worse impacting almost all industries like automakers, electronic device manufacturers, phone makers, and many other sectors that are increasingly reliant on chips for their products to work.

Other commodities

Russia also produces other commodities for industrial and household use. It has 17% of the globe’s natural gas, over 5% of coal, over 4% of copper, more than 6% each of aluminium and nickel, 15% 0f zinc, a little less than 10% of gold, more than 5% of silver, 14% of platinum and 11% of wheat. India’s imports from Russia mainly consists of mineral fuels, natural pearls and semi-precious stones, fertilisers and a whopping 75% of its total imports of animal or vegetable fat and oils apart from crude and petroleum. Crude from Russia is about 1% of India’s total crude imports. Last year, India imported 43,400 barrels per day of crude from Russia and 1.8 million tonnes of coal, about 1.3% of its total coal imports.

According to GlobalData, the London-based data analytics and consulting company, the prices of all these may escalate in the short term. And, according to Kotak Institutional Equities, the increasing risks of elevated and persistent energy prices and their resulting impact on various macro parameters will remain a dominant theme in shaping the market direction in the near term. An average crude price of $120/bbl in 2022-23 could increase average retail price inflation by 80 bps and negatively impact economic growth. The retail fuel prices, which have not been revised by more than four months, will gradually move up the market prices soon and to insulate the common man from the impact, the government will not only have to reduce excise duties of diesel and gasoline but also increase minimum support prices of foodgrains sharply.

In Kotak’s view, the government may also need to spend higher-than-allocated amounts in rural and social sector schemes in order to provide some buffer to economically weaker households. Macro headwinds may limit the euphoria over the BJP’s victory in the assembly elections for markets, it said. Though the Centre assured earlier this week that there will be no shortage of crude oil in the country due to the warlike situation, there was no assurance on prices.

“We will make sure that our energy requirements are met even though 85% of our requirements are dependent on imports for crude oil and 50-55% on gas,” Minister for Petroleum and Natural Gas Hardeep Singh Puri said on March 8, at the end of Assembly polls. He, however, said that India’s oil prices are determined by global oil prices. Oil marketing companies will determine the cost.

As part of their own strategy, oil companies have been augmenting their crude reserves. India’s largest oil firm, Indian Oil Corporation (IOC), which controls nearly half of the country’s fuel market, recently decided it will build nine more storage tanks to stock additional 10 million tonnes of crude oil at Adani’s Mundra port in Gujarat. The IOC has the capacity to refine 80.55 million tonnes of crude oil per annum into fuel. In the short run, storage can help, but, in the long run, alternative sources of oil, must be explored.

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