Low oil prices may boost India's GDP in FY2018

Moneylife Digital Team 09 May 2017

Economy & Nation

The price of crude oil has plummeted more than 15% in recent weeks, to around $48 per barrel. The easing of crude oil prices will have a positive effect not only on inflation but on India's gross domestic product (GDP) growth, says a research report.

In the note, State Bank of India (SBI) says past trends indicate that low oil prices lift global growth and, subsequently, domestic growth, significantly. It says, "During 2003-2006, when average Brent crude was $47 per barrel, the global GDP growth was 5.0% (average) and India’s average growth was at 8.6%. Now since average crude oil prices are going to be around $45 for the next half of 2017 or so, along with the positive macro fundamentals like projection of normal monsoon, lower CAD, continued spectre of low inflation (the Reserve Bank of India’s fears of higher imported inflation and higher global inflation may thus have a downside) and accommodative monetary policy and fiscal discipline, we expect a better growth number in 2017 and 2018".

According to SBI's analysis of the past few years (since 2011), oil prices in the second half are always lower than the first half of that year. On an average, oil prices in the second half of the year were around 6% less than the first half (in 2016, H2 prices were 11% lower than H1) since the last half decade.

"In 2017, till date the average crude oil price was $54 per barrel (maximum: $57) and given the current trend in non-OPEC (Organisation of the Petroleum Exporting Countries) oil production, we believe that crude oil prices may dip below $45 level shortly or even lower than that. US crude production has risen by over 10% since mid-2016 to 9.3 million barrels per day (bpd), close to the output of top producers like Russia and Saudi Arabia and is projected to reach 9.9 bps in 2018," it added.

SBI feels that the recent sharp fall, despite moderation in geopolitical risk, is driven by the market’s deeper worry that OPEC’s ad hoc steps are only going to worsen structural imbalances. OPEC and other major producers had been enjoying higher prices since agreeing in November to slash production, a strategy designed to rid global markets of excess supply. But now the strategy appears to be not working.

"We believe Saudi Arabia has now realised production cuts need to be implemented for at least 12-18 months to reduce the inventory glut. This would only serve to boost US shale production further, and cause a major decline in Saudi’s already falling market share. Saudi Arabia has already reverted to its protect market share strategy (currently at 31.3% of total OPEC production) as evident from rise in March output data (as compared to January 2017 level) and no cut in exports to Asian customers; this is driving the correction in crude prices. Saudi Arabia is likely to block the production cut extension beyond June 2017, in our view, and this will drive the crude price in H2 2017. The situation will get worse in 2018 when oil production is set to rise also in Canada, Brazil and Kazakhstan. As Graph 2 shows, excess demand actually turns negative in third quarter of 2017, implying that the downward spiral in oil prices may accentuate in second half of 2017," the report concluded.

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