Will the Black Gold Shine Anytime Soon?

While disruptions in the form of Russia-Ukraine conflict led to price escalation in crude oil, China Covid-19 lockdown and the US banking crisis brought it back to ground zero. The outlook for brent and US WTI looks uncertain as the world is caught between looming recession and bouts of positive economic indicators which emerge from time to time.    

As the world is grappling with high inflation, much of it can be attributed to commodities. After the Russia-Ukraine conflict, the situation slid down as prices of most commodities – be it edible, energy or metals – hit the roof. Energy, especially oil, is one of the major factors which determines the trajectory of inflation.

We are living in a time which appears quite confusing determining which way the wind of global economy is blowing. It is a situation where we are caught between two stools, undecided where to sit and take an informed call.

Ditto is the case with crude oil. The last week saw crude oil falling nearly 7 per cent over the previous week’s price. The declines were seen after five weeks of uptick.

The story for crude oil has been nothing short of a rollercoaster, though. In the aftermath of Covid-19, benchmarks Brent and West Texas Intermediate (WTI) hit their lifetime lows in 2020. On April 20, 2020, Brent hit a low of approximately USD 25, the US WTI tanked to negative USD 37. It was a colossal debacle which forced shut-down of several US oil companies.

The prices went up gradually hitting a whopping 123 per barrel mark in March 2022. It was that time when the Russia-Ukraine skirmishes had started, taking the world into a tailspin. As sanctions were imposed on Russia, the energy, metal and food prices went up exponentially taking global inflation to new highs. The US is still grappling with inflation not seen in the last four decades.

Another setback came in the form of the US banking crisis which led to a crash in the crude oil prices as they slipped to a year-low. The Brent fell to USD 78 per barrel.

Confusing Signals

As mentioned earlier, we are oscillating between two stools – recession and growth. The direction of growth or recession will be determined largely by what happens in the US and China which are the largest economies, and like two elephants on the road of economy. With a GDP of over USD 26 trillion (nominal, 2023 est.) and 19 trillion (nominal, 2023 est.), any visible impact will be seen only with a lag. As a matter of fact, both countries together share approximately 42 per cent of the entire world’s GDP in nominal terms, and 35 per cent in PPP terms.

Both the US and China will also determine how the world consumes crude oil. The consumption by these two economies will dictate the prices of crude oil.

The US Federal Reserve started increasing interest rate around 11 months back with an aim to bring inflation at a 2 per cent mark. From a near zero interest rate regime to a range of 4.75-5 pe cent, the hike has been unprecedented for the world’s largest economy. It undertook a 75-bps hike in three consecutive Federal Open Market Committee (FOMC) meetings that triggered fears that US could go into recession. The US reported two successive quarters of negative growth which only affirmed the fears.

However, the US economy performed better in successive quarters with strong job market and other positive economic indicators despite Fed’s continuance on hiking rate.

The China Covid-19 lockdowns sparked fears of crude oil consumption getting hit. The lower demand softened the prices.

At the time the dragon-nation began to lift restrictions and there was some hope for oil producing nations, the banking crisis in the US occurred, leading to crash in oil prices. The government and Fed intervened to arrest the crisis. The situation is in control, though the boat can rock if similar incidents repeat.

The Russian Maneuver 

While all this happened, Russia smartly played against the sanctions imposed by the US and the European nations. It found markets for its oil and has been selling it at a significant discount, hitting the prospects of Brent and US WTI.

Amid tussle between demand and supply, the prices have not been able to have a free run. In fact, to prevent it from further slide, the Organisation of Petroleum Exporting Countries (OPEC) announced move to cut production by 3.66 million barrels per day.

The Outlook

Central banks of most economies led by the US Federal Reserve have been increasing interest rates and are sucking what they called excess liquidity from their systems. To their disappointment, the results have been far short of what was desired. Inflation remains high in most big economies.

The FOMC will assemble, early May. The chances of a rate pause are now shifted away as the US continues to post strong jobs data and many of its economic indicators remain robust. The current inflation remains three times over the target of 2 per cent inflation and Fed has indicted that it would not pull its punches back and would continue raising rates. It has also clarified that it was ready to compromise on growth.

This means that another 50bps hike by June is quite likely.

This would strengthen the Dollar and hold oil prices from slipping further. But will the prices hold in the event of a recession in the US. It is not an easy answer.

Crude oil price could fall to as low as USD 60-65 in this year according to estimates by several experts. Also, countries would look to buy oil from Russia at the time when growth is a struggle for many of them. A discounted price is likely to compensate for a stronger dollar.

Indian Context

In the Indian context, we are seeing a stable inflation situation. The Reserve Bank of India (RBI) also did the unthinkable by pausing the rate in its April monetary policy and there is a popular belief that we have peaked the rate cycle.

India is also importing oil from Russia and the trade is in local currencies which hedges any untoward currency fluctuations.

India accounts for the third largest consumer of crude oil and a stable demand is likely to sustain. The only variable is the supply side issues though.


All these uncertainties do not augur well for the prospects of oil. Popularly referred to as black gold, whether it will shine is a question that is still unknown. Over the past week, prices have fallen despite declines in the inventory. A scenario of USD 60-65 per barrel price is good for the consumers as it will keep inflation in check but it will be a blow to the oil producers and they may not like it.

The decision to cut production was with a view to hold the prices from slipping down further but it does not appear that the move will pay dividends. 

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