China reopening could spoil India’s cheap oil party

The Russia-Ukraine conflict impacted much of the European economy during FY22. Eventually, Russia had to open up the oil market to India and China at steeply discounted rates of 25% to 30%.  That was because, much of the Black Sea trade was facing embargos. Now there is a new twist to the tale. One of the world’s largest and most respected investing houses, Goldman Sachs, is once again bullish on oil. It has now projected the Brent crude oil prices reaching $110j/bbl in Q3 if China and other Asian economies open up to trading completely. Of course, one can only grab the full picture once China actually executes its opening up plan, which is likely to happen after the Lunar New Year celebrations. 

If China reopens with a bang, India has worries on the oil front. The Chinese reopening will be seen as a boon for the oil market in the backdrop of worries regarding recession. Oil has been concerned about weak demand from China and the closed door policy only worsened these fears. Now that has changed as China has abandoned its zero-COVID stringencies. Along with relaxation of COVID norms following extensive protests, there is likely to be skyrocketing demand for oil. This is likely to lead to net increases in price per barrel. For India, this implies bad news given the massive Current Account Deficit at $36.4 billion in the September quarter. The weakening rupee and importing oil at higher prices is going to put India in a quandary, especially with its forex reserves just about sufficient to cover 9 month of merchandise imports.