As crude oil prices rise, MC explains what’s on the cards for petrol, diesel prices

After a gap of almost two years, the OMCs, including Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), on March 14 slashed fuel prices in the country by Rs 2 per litre.

Subsequent to the price cut, petrol prices in the national capital are Rs 94.72 per litre compared to Rs 96.72 per litre earlier, while diesel is being sold at Rs 87.62 per litre in Delhi.

Typically, OMCs revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the past 15 days. However, the companies had left fuel prices unchanged since April 2022 despite corrections in crude oil prices.

The decision to not revise fuel prices was taken in late 2021 and 2022 when crude oil prices had skyrocketed to high levels of $140 per barrel to protect Indian consumers from inflation.

What have OMCs said regarding further price cuts?

Indian Oil Chairman SM Vaidya told reporters on March 15 that a call on further reduction in prices would be taken considering the volatility in crude oil. Vaidya had said that crude oil prices are dynamic and the company is waiting for prices to show some trend.

Similarly, Minister of Petroleum and Natural Gas Hardeep Singh Puri had also said that a decision on fuel price cut would be taken post stabilisation in crude prices. OMCs are still posting under-recoveries on the sale of diesel, Puri said without disclosing the amount.

Though OMCs have booked healthy profits in the current financial year until now, they had reported huge losses in 2022. OMCs had not increased retail price and froze it for a record 137 days beginning November 4, 2021. That freeze ended on March 22, 2022, and prices were revised regularly by a total of almost Rs 10 before being frozen again from April 7, 2022.

The 132-days price freeze in 2021-22 hit the OMCs in the subsequent quarters in 2022-23 as margins shrank and they reported losses.

What has led to a rise in crude oil prices again?

The US benchmark Brent crude price touched a four-month high of $87.22 per barrel on March 19 amid the increased attacks by Ukraine on Russian oil infrastructure. Prices have risen as despite sanctions from the West, Russia remains one of the largest suppliers of oil to the world.

According to media reports, the US has urged Ukraine to halt attacks on Moscow due to the risk of rising global oil prices. This also comes as the US approaches its Presidential elections.

What are the other factors fuelling crude price volatility?

Demand from China, the largest consumer of energy in the world, is seen to be rising after a long time since the Covid-19 outbreak. The rise in demand from the country comes as several oil producing countries have cut production to support prices.

The Organisation of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, have decided to extend voluntary oil supply cuts of 2.2 million barrels per day into the second quarter of 2024.

The 48th meeting of its Joint Ministerial Monitoring Committee (JMMC) is scheduled on April 3 at which the committee is expected to review the production of the oil cartel.

The recent volatility in prices is also on account of the conflict between Israel and Hamas, and its implications on the Red Sea. The Red Sea is an important trade route as it accounts for 10 percent of the world's oil, grain and consumer goods shipments while the Middle East accounts for one-third of global oil supplies.

Iran-based Houthi rebels have intensified attacks on the shipments through the Red Sea in response to Israel’s bombardment of Gaza, forcing shipping firms to divert vessels through other longer routes. Freight and mandatory insurance costs, in turn, have surged.