In a conversation with ET NOW, Vandana Hari of Vanda Insights, sheds light on the Opec decision to cut oil supply by 1.2 million barrel a day and its possible impact on India's fiscal math.
Edited excerpts:
ET Now: Let us be honest Saudi Arabia literally teased the consumer nations. Saudi Arabias energy minister said no decision on a quantum has been arrived at and that he is taking into account Donald Trumps tweets. He also spoke about the meetings Narendra Modi had with Saudi Arabia and within 24 hours we hear about a 1.2 million barrel cut.
Vandana Hari: It is more of a difficult meeting. Some of the statements and messages that came out of the meeting in the lead up to the decision were very classic negotiation and bargaining tactics.
For instance, we had the Saudi minister at one point say that no deal can very much be the case. Basically, it meant that if people do not come around to our point of view, then we are happy to walk away from the table.
It was quite high drama and I think it was a difficult decision. There were quite a lot of individual countries interests and different point of views, all of which needed to be consolidated.
They held quite a long press conference after the end of a long day yesterday, therefore, the messaging was also done extremely carefully.
I think Al-Falih the Saudi minister was very careful to not make it seem that he was beholden to Donald Trump. He said he will put as much oil as is needed on the market despite this cut but it is not just because of Trump. He on a couple of occasions did mention the tweets and also how he had been listening to Indian Prime Minister Narendra Modi and I think all was part of very careful messaging.
ET Now: In the decision that has been taken, Iran does not have to participate and you have got Qatar which is now saying that it is pulling out of the OPEC from January. We already know about the tension between Russia as well as the United States. Having said that, would you now believe that Opec with Russia will still have the same kind of clout or is this a new kind of a trade war that could also be taking place?
Vandana Hari: If your concern is about will they really cut by 1.2 billion and who knows or will they end up cheating again? Well, that concern will always remain as long as Opec has any decisions to curtail production. There will always be an element of doubt and scepticism in the market.
However, given the very strong compliance and discipline that they have showed since the start of 2017 there is no reason to believe that it will be any different. But what does make things a bit different this time is that some of the lines have not been drawn as clearly as they had been in 2017. When they started out in 2017, there was very specific quotas for every country which was officially published by Opec, so everybody knew what each country has committed to produce.
This time, it is a little bit fuzzy. Every country has been asked to reduce by about 2.5 per cent from their October levels. But they do say they have the ministerial monitoring committee which is going to keep a close eye on everything.
ET Now: Talking about the India impact, the fiscal deficit is definitely going to be impacted and we have seen a bounce back of 5 per cent already in oil prices. There was a temporary relief that we got when crude prices had crashed by 40 per cent from the highs. Should the central exchequer and stakeholders in India now just come to terms with the fact that crude is going to stay at 60 if not above? Are the hopes that crude may reach 50 completely dampened?
Vandana Hari: Here is what India needs to keep in view – these are the high level outcome of everything that has been going on this year. Where crude ended yesterday, is actually a few dollars below where it started this year. Essentially, all the gains of this year have been wiped out and some more.
The market has more or less factored in everything that happened yesterday in terms of Opecs cuts and we have Brent sitting closer to 61.67 on Friday. I do not expect crude to remain under pressure from all the financial markets turmoil. I do not expect it to go way higher than where it is now. It should definitely be a relief for India and no reason to worry about crude going up to even $75 or $80 a barrell for now. Crude is not going to go down to the 50s but it is not going into the 70s either.
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