Oil market likely to experience more volatility going forward: Giovanni Staunovo

This invasion of Ukraine by Russia is definitely going to have far-reaching implications for the energy market, given that Moscow has the role as the world’s second largest producer of natural gas and one of the world’s largest oil producing nations. What does it mean to see oil at $100 a barrel?
First of all, we need to take a step back. Since 2004, there has been a massive drop in investment activity. Due to an undersupplied oil market, we have low inventories. We are still recovering oil demand and potentially we hit a new record high and in this context, we also have OPEC plus unwinding the production cut and their spare capacity falling to an extremely low level in the second half of the year. This makes the oil market very sensitive to any supply disruptions.

In the Indian context, high oil prices have a huge bearing on our economy. Is oil price over $100 going to be the new normal or is this just a knee-jerk reaction and we could settle back to $70-80 per barrel levels?
Essentially the system is very tight and with a missing spare capacity, the price needs to rebalance the oil market. Essentially one needs to ensure that supply and demand stay in balance in future also. What we are still experiencing at the moment is the reopening of the economies following the pandemic.

So, oil demand will reach a new record high and there are still some economies which are not open and there will be additional demand next year and the world economies are still expected to expand. There is also a lower desire in the shale industry to go back to the old mantra to drill as much as they can to generate production growth. There is not much spare capacity and so at some point, when the market is tight, the only way to fix the situation is to ensure that demand does not go up too much. Demand growth is curbed only by higher prices.

It is difficult to say where the pain level is. There is not one pain level. It is different from country to country; it is also dependent on currency and developments and interventions of the government’s subsidies. I would only say going forward we are likely to experience more volatility than in the past.

What is the overall implications in terms of the inflationary impact given that we import over 80% of the oil requirement? How do you see the impact on the overall current account deficit as well back home?
Obviously demand is still increasing and so imports are still expected to stay elevated and with higher prices will only increase the burden from fiscal and trade balance perspective. The only way to mitigate it a little bit, is to look at taxes but that comes with negative repercussions on the fiscal budget side.

There is not really much that the governments can do, particularly if a country is still oil dependent and needs to import its crude. Obviously from a long-term perspective, the Indian government tries to build strategic oil reserves to walk through periods of elevated price fluctuations.