Petrol price hike: Is a partial rollback justified?

Oil minister Jaipal Reddy today spoke about the double whammy of a falling rupee and an increase in crude oil price but a closer look at the data reveals a different picture - one that has the potential to punch holes in the arguments in favour of a hike.
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May 26, 2012, 01.03 AM | Source: CNBC-TV18

Petrol price hike: Is a partial rollback justified?

Oil minister Jaipal Reddy today spoke about the double whammy of a falling rupee and an increase in crude oil price but a closer look at the data reveals a different picture - one that has the potential to punch holes in the arguments in favour of a hike.

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Petrol price hike: Is a partial rollback justified?

Oil minister Jaipal Reddy today spoke about the double whammy of a falling rupee and an increase in crude oil price but a closer look at the data reveals a different picture - one that has the potential to punch holes in the arguments in favour of a hike.

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Oil minister Jaipal Reddy today spoke about the double whammy of a falling rupee and an increase in crude oil price but a closer look at the data reveals a different picture - one that has the potential to punch holes in the arguments in favour of a hike.

Reddy says the oil sector in India today confronts a double disaster - the rupee’s devaluation against the dollar and the increase in international prices of crude.
 
While this is Reddy waxing eloquent - the data somewhat clouds the claims.

Indian oil marketing companies (OMC) import around 112 million tones of crude annually via bilateral crude contracts with many countries

It is the price of this ‘Indian Basket’ that oil industry executives say is the crucial determinant of their finances rather than West Texas Intermediate or North Sea (Brent).

So how has the Indian basket behaved over the past few months?

The answer:

The average price of the Indian basket was USD 118 per barrel in April this year, lower than the USD 123.61 per barrel of March and almost equivalent to the USD 117.67 average for the month of February. Incidentally, the April 2012 price was the same as that in April 2011.

So how has the Indian basket fared so far this May?

On May 22, it was USD 106.43 per barrel. Just a week prior, it was USD 108.9 per barrel on May 17, declining from USD 109.53 per barrel a day before. The day the steep petro price hike came in to effect, the Indian basket was actually at USD 104.82 per barrel, almost the same level as the average price in October, 2011.

Once data for the full month of May comes in, observers expect the price to be lower than the previous month.

The rupee, which has so far depreciated nearly 26% year to date, has shown signs of minor improvement in the last two sessions.

Discounting for the ongoing rupee volatility and because of the nature of the oil purchase contracts, the off-hand conclusion could well be that the OMCs are seeking to recoup past under-recoveries, rather than mitigating the impact of more recent circumstances.

That also leads to another conclusion - If the Indian basket continues to soften, a partial roll back will become inevitable.

Also Read - GDP, rupee, inflation, petrol: Is Nifty in for a knockout?

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