Global bull-run in fossil fuels may be peaking out for now, glut seen ahead

Prospects of lower global economic growth amid fresh Covid wave and reduction in bond buying by US Fed weighing on sentiment

The global bull-run in fossil fuels like crude and gas may be peaking out due to several adverse factors. Analysts are downgrading global economic growth prospects due to the fresh wave of Covid infections across Europe and Central Asia.

The USD has strengthened, and may rise further. The US Federal Reserve has started to taper and it may accelerate its tapering schedule. A strong dollar is inversely correlated to commodity prices, which are dollar-denominated. In addition, the US President has been persuading nations with large oil stockpiles to release some of their inventories, which could result in increased supply.

Europe and North America have seasonal heating requirements, which normally leads to more demand for fuel oil and gas in winter. But given record numbers of Covid cases in large EU economies like Germany and France, and all of Eastern Europe and Central Asia, the net demand for energy fuels may ease. If there are fresh lockdowns (Austria has imposed one and Holland has a partial lockdown), demand could fall sharply.

The Fed has already started to reduce its treasury-buying programme, which was at $120 billion per month till October. It has announced a progressive taper of $15 billion per month starting November. Recent statements by senior Fed officials indicate it may increase the pace of tapering, if there’s a high-inflation scenario. This means tighter money supply. The USD may strengthen further. There is also the chance the Fed may hike policy interest rates earlier than was previously expected.

The latest advisories from Opec, International Energy Agency, and the Energy Information Administration (EIA) of the US all indicate fuel markets could go into oversupply in Jan-March 2022. The EIA forecasts an excess of 900,000 barrels per day over demand in that quarter. Apart from OPEC, the next calendar year will see higher production from the US, Canada and Guyana. Futures prices have started to adjust down for this.

The price of India’s crude import basket rose, from $63.4 per barrel in April 2021 to a high of $82 in October. However, both major benchmarks, Brent and West Texas Intermediate, peaked in price in late October and have dropped to 2-month lows, losing 7-8 per cent in the last week. Gas prices have been buoyed up by anticipated winter demand but are also moving down.

India imports over 50 per cent of its gas, and over 85 per cent of crude. Lower energy prices are usually beneficial because they take pressure off the Trade Account and ease inflation. Refiner margins also rise, when crude and gas prices drop. For refiner-marketers like the Indian PSUs and Reliance Industries, realisations at retail level rise. However, inventory revaluations do have an adverse effect on the bottomlines because fuel stockpiled at higher prices loses value.

This is an unusual period. The Indian economy is operating at well below capacity. Slower global growth will impact exporters who will struggle with lower demand. Thus, there could be downgrades of India’s growth estimates.

The stock market has responded negatively. While the Nifty has lost 5.5 per cent in the last month, the NSE Energy index has lost 6.7 per cent. On Monday, the Nifty lost 1.96 per cent while the Energy index lost 2.8 per cent. Double-digit losses have been incurred in the last month, by Reliance Industries, NTPC, BPCL, GAIL, with IOC and ONGC losing 6.75 per cent each as well. The only major gainers during this period have been Adani Green and Adani Transmission.