Vandana Hari, Founder & CEO, Vanda Insights, says “perhaps $70-75 is the range for a longer term. It is far more comfortable for India than $80 or more. Longer term, if the twin pressures remain concurrently present – the rupee continues to be weak and oil prices continue at current levels or go even higher – it will have a dampening effect on the Indian economy.”

What do you put down as the major reasons for this rise in crude prices that we are seeing in crude oil prices and where do you think prices are headed from this point?
Vandana Hari: I think there is a considerable risk premium in crude right now. I would put it at anywhere between $12 and $15 a barrel. It is mainly coming from two factors. One is the Middle East. The Gaza war has been festering for several months now, that has not actually restricted any supply, but there has been this constant fear of a ripple effect of that widening into the Middle East and that fear was talked about again this week with the bombing of the Iranian consulate in Syria. So, quite a bit of risk premium on that account.

We know that Israel and the US are both on alert now because Iran has promised revenge for that incident. The other factor is, of course, Ukraine’s spate of attacks on Russian refineries, we saw through the month of March an estimated 700,000 to 800,000 barrels per day – nearly 14% of Russia’s refining capacity – has been forced to shut as a result of these two factors. While actual supply has not been affected to the extent that prices are factoring in, I would call this quite a bit of speculative premium there as well. We know that hedge funds and other major speculators have jumped in a big way over the past two to three weeks. They have established long positions in crude futures. It is essentially a fear premium and a speculative premium at this point.

Dr Fereidun Fesharaki told us that he believed that these high crude oil prices should not be a problem for India and we can easily afford $80 per barrel rate. Do you agree with him?
Vandana Hari: I have the utmost respect for Mr Fesharaki. I would not want to get into a…, he said, she said… but I disagree. We are all independent analysts in our own right. And while, arguably India can pay $80 and throughout last year, we saw the prices were much higher through 2023 and yet the Indian economy did very well, inflation was much higher as well and India still managed and not only that, Indian oil consumption continued to grow in 2023. However, I would not necessarily use that as a yardstick going forward because in 2023, to a large extent, India still had the momentum of recovering from COVID.

So, for these periods, yes, and of course not to forget that throughout last year, the government did not allow any movements in the pump prices. That also shielded the consumer to a large extent from what was going on in the international markets in terms of high prices. I would say that perhaps $70-75 is the range for a longer term. It is far more comfortable for India than $80 or more.

You have cited the historical context which is appreciated, but when you look at what could happen with crude oil prices in the future, how do you think that is going to impact? Already we are talking about a falling rupee. If crude oil prices remain at elevated levels, how would that play out in the Indian economy?
Vandana Hari: Yes, I think the rupee depreciation is a double whammy for the country because crude prices are high and now refiners are going to have to fork out much more in rupee terms to buy the same barrel of oil. Longer term, especially if these twin pressures remain concurrently present, the rupee continues to be weak and oil prices continue at current levels or God forbid, they go even higher, it will definitely have a dampening effect on the Indian economy. That said, it has got a really good, strong momentum going. I do not think it will be a big hit, but this is something India does not want at this stage – the double whammy of a weak rupee and high oil prices.