For India, which imports some 80 per cent of its requirement of crude oil, the price of a barrel matters for its GDP growth, and hence, for its stock market. India, the third-largest importer of crude oil, imports some 1.8 billion barrels a year, so every $1 increase means a $1.8 billion larger bill.

Several factors influence the demand and supply of oil, making it difficult to predict how the various moving parts would play out and influence prices either up or down. Brent crude fell from $85 in mid-Oct 18 to $50 in a month, (after a threat Trump tweet), and have, since, risen to $71.

Will they hit $80, as some expect, or fall again to $60.

Like any other commodity, the price fluctuates with demand and supply, with several factors, geopolitical, technological and economical, affecting the movement of both.

Geopolitical factors are a major force, especially after Donald Trump. He has imposed sanctions on Iran (giving exemptions to a few countries from sanctions, including India), in an attempt to compel it to sign a better nuclear containment treaty; he has imposed sanctions against Venezuela, the country with the world’s largest reserves, but is bankrupt and can’t exploit them, in a bid to install an unelected leader and topple an elected one; and he has aided/abetted curtailment of supplies of crude oil from Syria, Libya and Sudan.

The resultant drop in supply raises prices (which is why he gave a limited-time exemption to import Iranian oil to a few countries, not because they are his favourite friends). The exemptions are due for renewal, giving Trump the ability to twist a few arms.

Technology is another factor. Thanks to horizontal fracking of shale oil, the US is now the world’s largest producer of crude, exceeding the output of Saudi Arabia. The inexplicable thing here is that shale companies, though profitable, are not generating ‘free cash flow’. Free cash flow is the amount of cash flow from operations needed to stay in business.

The peculiar feature of the shale industry is that shale oil is trapped in rock and is not a pool, like an oil well in Saudi Arabia. Thus, some 80 per cent of shale oil is produced in the first year, and about 5 per cent in the remaining four years.

So, if a producer does not drill again in year two, his production drops to 5 units from 80. So, he has to borrow to stay in business. Obviously, this is not a sustainable model.

In order to sustain growth, the larger traditional oil companies, such as Exxon Mobil and Chevron, are buying out the smaller independent shale producers, and, because of the size of their balance sheets, are able to continue pumping oil, despite the negative free cash flow.

But if, at some point, they lose their optimism, US supply will fall off sharply if the shale gas industry continues to produce negative free cash flow and investors stop supplying money for capex. Perhaps further improvement in technology may stave off that day.

Crude prices are more likely to rise before they fall. This will put pressure on India’s CAD, weaken the rupee, which has lately been strong, and reduce the chances of a further interest rate cut (higher rate would be needed to prop the currency). But if the government accepts an analysis by RN Bhaskar, veteran journalist, and uses human/animal waste to generate methane, in his must read book Game India , then India can eliminate crude oil import entirely, which will crash the price to below $60. Why we do not use this route is a mystery.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)