‘Oil prices surge as Israel and Iran continue to exchange missiles….’, ‘Oil prices jumped more than 10 per cent as the strikes continue …’ and ‘Inflationary concerns are back due to oil price shock…’ are the headlines that Jay could see as he scrolled through TV news channels.
Being an auto enthusiast, he’s comfortable working with the mechanics of cars and bikes. He now wants to know more about oil, especially since it is in the news now. So, he visits his friend Juhi, a financial analyst, and an oil market expert.
Jay: Why are these guys blowing up each other? As if the world does not have problems already! And what does this have to do with oil prices?
Juhi: I wish not to answer political questions. But about oil prices, it’s about the geography and the production capacity of the countries involved, particularly Iran.
Jay: Care to explain that better?
Juhi: Look, Iran’s oil production is nearly four million barrels per day (mbpd), which accounts for about 4 per cent of global output.
Jay: But I read somewhere that Iran is under sanctions. So, nobody buys oil from them, right? So how does that matter?
Juhi: Actually, China has been bypassing the sanctions and buying most of the Iranian crude exports.
Jay: How much does Iran export?
Juhi: Of the total 4 mbpd produced, around 2 mbpd are exported, most of it to China.
Jay: So, if Iran cannot export oil, China may have to look for alternatives?
Juhi: Exactly. That shifts the supply-demand balance, pushing prices up. Add to that the rising shipping and insurance costs due to the conflict, and it is a perfect storm.
Jay: Even then, a 2-mbpd cut does not justify more than 11 per cent price jump since the conflict started (June 13).
Juhi: Fair point. But there is another factor the market is anxious about.
Jay: What now? Nukes?
Juhi: That’s a different chapter! What really makes the market nervous is the Strait of Hormuz. This is a chokepoint near Iran through which about 20 per cent of the world’s oil flows. Doesn’t that help explain the price spike?
Jay: I must admit that’s a big number! But Iran does not own the Strait of Hormuz and Oman has its territorial waters at Hormuz, right?
Juhi: True. But in the past, Iran has threatened to block it. Even without an actual blockade, just the threats will add a risk premium to oil prices. That’s why you see both Brent and WTI rallying.
Jay: Speaking of which, what is the difference between Brent and WTI crude oil? I read somewhere that the difference between their prices has shrunk.
Juhi: You must have read about “narrowing spreads” between the two. Brent crude is the global benchmark, whereas WTI crude, which stands for West Texas Intermediate, is the US benchmark. So, WTI is more influenced by what is happening in the US.
Jay: So, something happened in the US recently?
Juhi: Connecting the dots? Yes! But rather than the US, I would say North America. US oil rig counts have dropped, and Canadian wildfires disrupted some supply. Hence, WTI prices jumped, leading to the spread between Brent and WTI futures narrowing to $1.25/barrel last week (June 13), the lowest since September 27, 2023.
Jay: Well, fine. Do you think the price rally will lose momentum?
Juhi: The price rally may soon end, hopefully.
Jay: You expect the conflict to end?
Juhi: That’s completely out of our hands and geopolitics is a complex subject to understand. I wouldn’t come to any conclusion based on it.
Jay: Now I’m confused. So, the Israel-Iran confrontations might continue, but the prices may still ease? How?
Juhi: Because supply and demand isn’t just about Iran or Israel.
Jay: That’s precisely my question. Given the current situation, we cannot rule out the possibility of supply disruptions, and it can lead to higher prices, right?
Juhi: You have forgotten the big guns in the oil market. Of course, Iran is a big producer with 4-mbpd output. But not as significant as, say, the US or Russia or Saudi Arabia. In 2024, these countries produced 13.21 mbpd, 10.53 mbpd and 10.7 mbpd, respectively.
Jay: Will they ramp up production to offset any supply gap?
Juhi: OPEC+ as a group, even before the conflict between Iran and Israel began, were already on it.
Jay: Well, before telling me why they would increase production, tell me what OPEC and OPEC+ are.
Juhi: OPEC is the Organisation of the Petroleum Exporting Countries, a group of major oil producing countries such as Saudi Arabia, the UAE, Iraq, Iran and Kuwait etc. OPEC+ includes OPEC plus other big players such as Russia, Kazakhstan, Mexico etc. Together they control about 40 per cent of the world’s oil supply.
Jay: That’s a big number, for sure. Now, tell me why they are increasing supply even when prices were low in recent times.
Juhi: To be precise, they’re not adding new supply, just reversing earlier cuts.
Jay: Let’s look at the numbers. This is getting interesting.
Juhi: Yes, of course! Now, look at this data (refer chart). To support prices, in November 2022, the group decided to scale back 2 mbpd of production. In April 2023, some members of OPEC+ announced voluntary cuts, amounting to 1.66 mbpd. So, the cumulative production cut was 3.66 mbpd. Furthermore, from January 2024, a few members voluntarily cut another 2.2 mbpd, taking the cumulative cut to 5.86 mbpd.
Jay: So, the group is now targetting rolling back only a part of this?
Juhi: That’s right. Between January 2024 and March 2025, the cumulative cut in production carried out by OPEC+ was 5.86 mbpd. In April this year, the group restored nearly 0.14 mbpd of this. A further 0.41 mbpd of production cut will be restored every month for the three months until July.
Jay: At the end of July, cumulatively, the group would have reversed 1.37 mbpd of production cut, right?
Juhi: Correct. And they aim to fully unwind the 2.2-mbpd voluntary reductions by late 2025. And remember, even after this, the 3.66 mbpd of cuts they undertook will be in place. So, there will be excess capacities and should the countries decide to increase the supply, the prices can be dragged lower.
Jay: But additional capacities do not automatically mean that they will increase the supply, right? They might as well choose not to.
Juhi: Of course, that is a possibility. That is why volatility is here to stay.
Jay: How about the demand? We have not discussed the other side of the equation.
Juhi: Energy Information Administration (EIA) forecasts the consumption to increase by 0.8 mbpd in 2025 and 1.1 mbpd in 2026. At the same time, production is expected to increase by 1.6 mbpd in 2025 and 0.8 mbpd in 2026. This will only increase the already-bloating oil inventories, which is negative for crude oil prices. Refer to the data to get an overview of the situation.
Jay: Okay, now this might sound silly, but Iran’s export figure and OPEC+’s production restoration are almost the same. Is there some kind of secret deal?
Juhi: Don’t steer me into conspiracy theories. All I can say is supply growth is expected to be higher than demand growth. And there is potential for ample supply from unused capacities. So, even if Iran’s supply is totally cut off and assuming that there won’t be any blockades in the Strait of Hormuz, there is no reason for us to worry.
Jay: But what if Iran blocks the Strait of Hormuz?
Juhi: If that happens, that will be a disaster, and we would all be in trouble. Oil prices will shoot up, inflation will rise, central banks may rethink rate cuts and yes, your weekend bike rides could be at risk.
Jay: Noooo! Let us hope diplomacy wins. I want my weekend rides. Now there is another worry. A few of my friends and I have been investing in certain oil-related companies. What will be their fate?
Juhi: It depends on which side you are on. If you have invested in companies that operate in the production side of the equation, it’s good news, as higher crude oil prices can translate to higher revenues and margins. So, stocks of companies like ONGC and Oil India will stand to gain from this. According to some research reports, an increase in $5 per barrel in crude oil prices can improve the margins of these companies between 5 per cent and 10 per cent.
Jay: And the bad news?
Juhi: The trouble will be for Oil Marketing Companies (OMCs) such as IOC, BPCL and HPCL. Since they are downstream companies, costlier crude oil means their profit margins from retail sales of fuel will take a hit and they may even end up with under recoveries if the price moves higher.
Jay: Just my luck — I always pick the wrong side. What about other industries?
Juhi: Airlines, paint and chemical companies, tyre manufacturers, rubber industry, fertiliser companies are all sensitive, at varying magnitude, to crude oil prices. They might feel the heat.
Jay: And those charts you were studying earlier?
Juhi: Those are technical charts — they help track trends.
A look at the charts
Oil prices shot up recently, triggered by the conflict between Iran and Israel. Are we going to see more rallies or are we nearing the end of the uptrend? Here’s an analysis.
Brent crude futures ($77/barrel): After falling to a four-year low of $58.40 on April 9, there was a change in trend. Notably, the price has been rising sharply since the beginning of June. The chart suggests that the contract might see a little more of an uptick — to $80-82 resistance band. So long as this level holds, the bias will be bearish.
A resumption of downtrend on the back of the $80-82 resistance band can drag the contract to $63-66 before the end of this year. However, if Brent crude futures breaks out of $82, the medium-term outlook can turn bullish, potentially lifting the contract to $92 by the end of 2025. The price region between $92 and $95 is a resistance. Subsequent barrier is at $100.
MCX crude oil futures (₹6,404/barrel): The contract made a four-year low of ₹4,724 on May 5. Since then, the contract changed direction and has been on a rally, which intensified recently. However, there is a resistance ahead between ₹6,800 and ₹7,000.
If the contract resumes the decline from the current level or after a rally to ₹7,000, it can possibly retest ₹5,200 and ₹5,000 before the year-end. But if it surpasses ₹7,000, the bulls can gain more strength. In such a scenario, crude oil futures can rally to ₹7,800-8,000 price band. Resistance above is at ₹8,600.
Published on June 21, 2025
