Oil prices rise as big producers may freeze output

Oil prices broke above $40 a barrel on Wednesday, driven by anticipation that the world’s largest exporters may agree as soon as this month to freeze output, which could accelerate a decline in the largest global build in unwanted crude in years.

Producers in and outside the Organization of the Petroleum Exporting Countries (OPEC) plan to meet in Moscow on March 20 to discuss an output freeze, an Iraqi oil official told state newspaper Al-Sabah.

Russia’s energy ministry said no date or place had been set for a possible meeting, but this had little impact on the oil market.

Brent crude futures gained 73 cents to trade at $40.38 a barrel by 1200 GMT, having touched three-month highs on Tuesday above $41. U.S. crude futures were up 56 cents at $37.06. “The consensus is for supply and demand to improve in the second half of the year. The problem was always with the first half .. which is heavy,” Petromatrix crude oil strategist Olivier Jakob said.

“Add all this momentum for actually increased talks between OPEC and non-OPEC — if there is a freeze agreement of some sort, then it could (form) the bridge to the tighter supply/demand balance in the second half, so I think that has definitely helped to support prices.”

Oil prices have risen by around 25 per cent since Saudi Arabia, Qatar, Venezuela and non-OPEC exporter Russia said in mid-February they would leave supply at January’s levels if there was enough support from other producers.

Nervousness is running high in oil-dependent nations whose budgets have been tattered by weak prices, such as Algeria, which warned the recovery in crude was “very unstable” and could reverse.

Credit ratings agency Moody’s warned of the potential for more curtailments to output from defaults arising from the low oil price, which in January was at its weakest in nearly 13 years.

Analysts at Bernstein said poor economics could lead to more oilfield closures.

“Only two months into 2016 we find cumulative shut-in production has already reached 60,000 bpd (barrels a day) and up to 260 million barrels of reserves,” Mr. Bernstein said.

U.S. output is falling, but slowing demand and a global production and storage overhang are capping any potential for bigger price gains.

Energy consultancy Wood Mackenzie said it expected “the annual average price for 2016 to be lower than 2015 and then recover in 2017, reflecting large oversupply and high stock levels during the first half of 2016.”

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Increase excise duty on oil, petroleum for more revenue

As growth rates in the global economy contracts and oil producing countries getting squeezed, the Indian economy needs to focus on domestic infrastructure to push domestic demand. The coming Budget 2016, could accelerate India’s economic growth by increasing infrastructure spending.

A focus on low gestation projects like rural roads, canals, bridges can result in immediate economic benefits. These can be accomplished by extending the budgetary allocations and non-plan expenditure to small-scale projects, railways, ports, etc.

While the fiscal targets of 3.9 percent for FY16 and 3.5% for FY17 are in the right direction, a stimulus to the infrastructure can be accommodated by extending fiscal targets.

As the private sector is sitting on spare capacities, they are unlikely to make capital investments now. Therefore, the government can create room for capital spending. Further, the banking sector needs a supporting hand by the government in order to extend credit in a big way as the economic engine gathers steam.

The government can also increase its revenue. Excise hikes on oil and petroleum products can therefore be considered as a right move by government to increase revenue, which can give the government room to raise infrastructure-related spending. Efforts should be made to bring revenue deficits under control through an effective tax implementation and collection system.

The proposals of the Goods and Services Tax Bill, held as it is for some a long time, could be implemented in a different way. The government can consider changing the tax structure in a way which draws on the GST bill, while excluding state sales tax. This can be implemented across the country, which could then bolster domestic trade.

Over the last many years, the government has encouraged capital expenditure to boost production and economic growth through incentivisation.

The government could also look at innovative schemes and incentivize private sector employment generation. This way we could better harness the demographic dividend of the country.

At 7.3% GDP growth rate, India is still among the fastest growing economies in the world so there’s no cause for alarm. But there is a need for increasing capital to the right sectors at lower costs. Therefore, the budget could chalk a path to increase financial savings and reduce interest rates.

Taxes on financial products could be streamlined in order to attract more people to invest in financial products. The mutual fund industry that channelizes savings into capital and debt markets could do with additional tax benefits.

Budget 2016 could increase the tax exemption limit and provide an additional exclusive increase, solely for equity linked savings scheme investments.

The government could also extend tax benefits to hybrid and balanced funds as they play a vital role in asset allocation and financial planning of households. Also, for the growth of the industry, pension & insurance money can be managed by the MF industry just like in developed countries.

The author is Managing Director & CEO, ICICI Prudential Asset Management Company

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