Crude Oil Price Gap: $100 Screen Price Could Mean $145 in Physical Market
Kotak Securities warns that soaring shipping costs could drive physical crude prices to $145 per barrel despite lower screen rates.
The gap between quoted crude oil prices and actual market transactions is widening significantly due to skyrocketing shipping costs. According to Anindya Banerjee, Head of Commodities Research at Kotak Securities, a benchmark screen price of USD 100 per barrel could effectively translate to nearly USD 145 per barrel in the physical market.
The Impact of Soaring Shipping Costs
The complexity of the modern oil market has reached new heights, where the price seen on trading screens often fails to reflect the reality of physical transactions. Banerjee highlighted that rising freight rates are the primary driver behind this discrepancy.
Freight Costs Driving Disparity
The cost of transporting massive quantities of oil has surged. Specifically, Very Large Crude Carrier (VLCC) freight rates have surpassed the USD 1 million mark. This surge in logistics costs adds approximately USD 25 or more to the cost of every barrel. Consequently, what appears to be a hypothetical price on a screen can result in much higher costs for actual physical delivery.
At the time of the analysis, Brent crude was trading at approximately USD 101.31 per barrel, while another crude oil benchmark was trading at around USD 89.71 per barrel.
Geopolitical Drivers and Market Premiums
The oil market continues to command a substantial premium, driven by real-world supply constraints. Banerjee noted that refinery outages are a significant factor in this market tension. Interestingly, he observed that the conflict in Ukraine is currently exerting a greater influence on global crude markets than the ongoing tensions in West Asia.
India's Strategic Position
Despite these global disruptions and the potential for price shocks if global crude prices spiral upward, India appears to be in a strong position. Banerjee noted that India is relatively well-protected due to two key factors:
- Sufficient Refining Capacity: India possesses enough refining infrastructure to handle demand and even export refined products.
- Diversified Sourcing: The country's ability to source from various locations protects it from physical shortages.
As a result, India has evolved into a major swing supplier of fuel products to the global market.
Outlook on Gold, Silver, and RBI Policy
Turning to precious metals, Banerjee suggested that gold and silver prices are likely to trade within a specific range for now. He noted that as long as US yields remain elevated, significant upside for these metals is unlikely, as the market awaits a shift in the US interest-rate cycle.
Regarding domestic monetary policy, Banerjee shared his expectations for the upcoming Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting. He expressed a leaning toward a rate hike, citing the massive liquidity cushion in the financial system, with core liquidity remaining well above 10 lakh crore rupees.
He suggested a 25 basis point hike in October is likely, with a potential subsequent hike in December—bringing rates toward 5.75 per cent—depending on how oil prices evolve.