Oil demand continues to grow in China and India, but the recent rise in oil prices has raised two key questions: To what extent can Asia absorb the impact of rising oil prices? And can governments continue to pass on the costs to consumers?
In this video, Senior Editor Sambit Mohanty examines how the region is facing the challenge of rising crude oil prices and how some governments are trying to address it, particularly after the US revealed its plan to leave the Iran agreement,which could in turn lead to a drop in supply.
Is Asia resilient enough to absorb rising oil prices?
By Sambit Mohanty
Welcome to The Snapshot - our series examining forces shaping and driving global commodities markets today.
Rising oil prices have raised two key questions for Asia -- To what extent the region can absorb the price impact without witnessing a drop in demand? And to what extent governments can pass on the price rise to end consumers?
Despite crude continuing its upward climb, demand has remained resilient in China and India, Asia’s two biggest pockets of growth. China's apparent oil demand grew 6.8% year on year in Q1. And in India, oil products demand grew 8.5% in the same period.
The impact on demand could become more obvious in the next few quarters. S&P Global Platts Analytics expects Asian oil demand growth to ease to 1 million b/d, from an average of 1.2 million b/d in the past three years.
But that said, strong economic activity should continue to support demand in the longer run.
Economists and analysts at S&P Global believe that many oil-dependent countries in Asia have stronger economic fundamentals to absorb the oil shock better now than in the past when prices surged.
In India, the impact of higher oil prices on the current account deficit is already visible. CRISIL, a unit of S&P Global, expects India's current account deficit as a percentage of GDP to be at 1.9% in fiscal 2018, up from 0.7% in the previous fiscal year.
India certainly has the option of cushioning the impact by cutting excise duties on gasoline and gasoil. But that would mean more pressure on the fiscal deficit, which is already under strain.
China's balance of payments remains robust. This should help to absorb the high oil prices better. It should also have limited impact on inflation, given the smaller weight of energy-related items in the basket.
Although Malaysia has become a small net oil importer, it remains a major exporter of LNG. As LNG prices rise, it should help to neutralize the impact of higher oil prices on balance of payments.
When crude oil started its downward trend in 2015, Asian countries used it as an opportunity to cut subsidies and implement taxes for fiscal gains. They did it by cutting retail prices at a lower rate than the pace at which crude prices fell.
Those policy measures in a low price environment did not hurt end-users. As a result, demand remained robust.
But now, governments are feeling the stress as retail prices surge. Some countries are in serious discussions with their oil companies on whether to raise product prices at a similar rate as crude oil.
With the US now planning to leave the Iran nuclear deal, this could lead to a fall in supplies and could put upward pressure on prices. To give an example, about 70% of Iran’s crude exports came to Asia in April.
Will this add to the problems of Asian buyers? Are we going to see some policy reversal in the region?
Until next time on The Snapshot, we’ll keep an eye on the markets.