Uncertain tides in oil: India's gains tempered by multiple export risks

The International Energy Agency (IEA) has released new projections for demand growth in crude oil globally this year. The new estimates sharply reduce demand growth over the coming year by 300,000 barrels per day (bpd). This is a large reduction from the over 1 million bpd demand growth predicted earlier, and it appears to reflect broader concerns about overall challenges to economic activities in the midst of policy uncertainty and a brewing trade war sparked by United States President Donald Trump’s tariff announcements. This comes in the context of several other developments in the oil market, including the decision by the oil producers’ cartel to increase production next month. However, the new IEA estimates will not take the market entirely by surprise.  Expectations of higher supply and lower demand were already visible in the price movements for crude oil over the past weeks. At one point, crude oil was, according to certain measures, trading below $60 a barrel last week. Multiple agencies have slashed their estimates of prices, though few think they will test $60 a barrel again. 

Importantly, the IEA predicts that a combination of circumstances would cause growth in the consumption of crude oil to continue to slow next year. The agency suggests that macroeconomic uncertainty is partly responsible, but it also holds up continuing demand for electric vehicles. Overall, there may be “excess” production of 1.7 million bpd at the beginning of 2026, driven in part by increases in extraction in countries outside the cartel. Russia and some Gulf states that are dependent on higher oil prices to finance budget deficits or — in the case of Russia — their military ambitions will face some fiscal constraints. However, the impact on production in the US is not very clear. Some North American producers are at the higher end of the cost spectrum and might find their operations unprofitable if prices stay at $60-65 too long. The choices before the leaders of these nations are difficult. The Saudi Arabians have chosen to increase output rather than try and control prices, although the base case for their budget deficit this year is growing to almost 6 per cent of gross domestic product. And the US leadership has chosen to double down on policy uncertainty rather than restore growth confidence. But they might be forced to revisit these choices. 

For India, which is overwhelmingly a net importer of fossil fuels, lower oil prices might appear to be an unmixed blessing. Certainly, those will reduce the import bill. But it is important to remember that even here there are complications. Public finances have a complicated relationship with oil prices, even as fuel subsidies have reduced significantly over the years. The effect on the external account is also rife with complications. Imports will decrease in value, but so will exports of refined oil. And the overall macroeconomic uncertainty, which led to a decrease in oil demand globally, will also reduce the demand for other exports. A lower oil-import bill is likely to have a favourable effect on the current account, but global uncertainty could still lead to financing challenges. The government will have to watch this market very carefully. The benefit of lower crude-oil prices may be outweighed by the underlying cause of lower demand. Sustained global uncertainty and risks to global growth will remain a policy concern in the foreseeable future.