Two years ago, global commodity analysts were gung ho that crude oil prices would find it difficult to rise beyond the $60 a barrel mark. This view was based on the excess supply of crude oil sloshing around, thanks to weak global demand, high inventories, US shale production, lack of coordination among OPEC countries and so on. But all these factors have miraculously reversed in the last couple of years. After crashing from over $110 a barrel to under $30 a barrel between June 2014 and January 2016, prices of NYMEX Brent have defied analysts to vault over the $64 a barrel mark recently.
Accelerating global economic recovery, rising demand, sharper than expected cutbacks by OPEC and geopolitical tensions have all kept prices above $60. While global forecasters still expect crude oil to average $62 to $63 in 2018, given rising US shale output, the past year has proven that crude oil can be the wild-card factor in Indian inflation rates. Fuel has a direct 6.8 per cent weight in the CPI and a cascading impact on other CPI components as well. So, if oil prices shoot up beyond the $62 to $63 comfort zone, one can expect Indian interest rates to head higher.