While election season is typically an opportune time to announce oil price cuts, the ongoing crude price volatility –with crude prices oscillating between $90 and $70 per barrel – could make such a move tricky this time, oil ministry sources and experts said.
A senior oil ministry official recently said that the oil marketing companies (OMCs) have not reduced retail fuel prices despite sinking crude oil prices due to high volatility, adding that the companies would further monitor prices before deciding on a price cut.
With crude prices hitting three-year lows recently and staying around $70 a barrel for a month now, state-run oil OMCs have the fiscal space to cut prices but they may prefer to further monitor the situation, according to experts.
“The government is likely to wait for some more time to see if the slump in oil prices is transitory or will last. The benefit will flow if the decline in oil prices stays. There is a demand slump from China but also because of geopolitical risks. Our sense is that oil will not stay at the current levels as the average oil price is expected at $80 per barrel for this year, lower than last year, said DK Joshi, Chief Economist at rating agency Crisil.
Opportunity to cut fuel prices
In India, low crude oil prices could translate into a reduction in prices of diesel and petrol—which the OMCs have kept unchanged since March citing volatility in crude prices.
“There is a combination of oversupply and weak demand in the oil market. The advanced countries are reeling under slow growth. There is a massive slowdown in China, which is a cause of concern for the oil market. Elections in the advanced countries are also creating uncertainty. There is uncertainty in the global economy. Do not think the OMCs can cut prices at this point. Too much fluctuation in the retail market is not good for the Indian economy,” NR Bhanumurty, Director, Madras School of Economics, told Moneycontrol.
“The OMCs rather use the profits to transfer resources to the government as a contribution to non-tax revenue. Along with that, the OMCs have past subsidy dues of around Rs 25,000 crore to be paid to upstream oil companies like OIL and ONGC. The OMCs would rather use it to repay that. The additional resources can also be used to set up a price stabilisation fund for the oil market similar to that exists for agriculture,” he added.
Oil prices recently have primarily been driven by global demand despite the Organisation of Petroleum Exporting Countries (OPEC) enforcing supply cuts. The prices slumped to the lowest in three years in mid-September.
Oil exporting countries, majorly concentrated in the Middle East, have been unable to support prices as demand remains weak from China, the world’s largest crude importer and second-largest consumer, and dwindling demand from other countries as well as they move towards cleaner fuels.
Some experts, however, believe a price cut by OMCs would help reduce inflation and boost consumption demand in the country.
“It is opportune time for OMCs to cut prices to reduce headline inflation. The RBI also targets headline inflation. Consumption demand will also get a boost as transport affects all other prices. Fuel price is like interest rate change. The government should revert to oil prices at the pump being related to global prices. This will surely help in improving the overall macroeconomic situation,” Rajiv Kumar, former Vice Chairman, NITI Aayog.
What's causing the volatility?
Continuing its downward trend, crude oil in September witnessed a striking dent as prices began hovering close to $70 per barrel and nosedived to around $69 a barrel on September 10—the lowest since December 2021.
Slowing consumption from China due to weaker-than-expected economic growth and deeper penetration of cleaner fuels and electric vehicles in the country has weighed on crude prices. OPEC cut its forecast for oil demand growth from China to 653,000 barrels per day (bpd) from 700,000 bpd for 2024, in its latest oil report.
Moreover, the US is pumping record-high levels of crude oil this year, leading to worries of an oversupply in the market amid dwindling demand. Oil supply for other countries including Libya and some Middle-East countries is also expected to rise.
Morgan Stanley earlier in the month said that the global oil market is facing a period of demand weakness similar to those seen during recessions.
“The weak demand from China has led to a slump in global crude oil prices, not excess supply from the US or OPEC. Also, the GDP growth of India hovering around 7 percent and not more, and the overall global economy also not showing huge momentum has led to weak demand. In the advanced countries, the overall oil demand is not on the rise. There is also oversupply by Russia. There is a disconnect in the market about understanding the oil supply situation,” said Kumar.
Crude oil in 2024
Global oil prices have been highly volatile this year, breaching $90 per barrel in April due to geopolitical tensions in the Middle East, before plummeting to around $70- $72 a barrel currently due to demand concerns from China.
The first half of the year saw relatively high prices on account of supply cuts from OPEC and its allies (OPEC+) and Middle-East tensions. However, prices soon began plummeting in the year due to the limited impact of the war on the crude oil market.
Crude prices further declined on the oil cartel’s decision to withdraw voluntary cuts starting September 2024. OPEC has now, however, decided to delay the planned increase in the group’s output for two months starting October, stating that it could further pause or reverse the hikes.
Impact on India: Petrol, diesel prices
At home, retail fuel prices are determined by the OMCs based on international oil prices as India is dependent on imports for around 87 percent of its crude requirements. 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 March despite a correction in crude oil prices.
The companies had last reduced the prices of petrol and diesel by Rs 2 per litre across the country in March ahead of the Lok Sabha elections.
“Low crude oil price is gainful for India as it impacts inflation, CAD and bond yields. Some benefit is already flowing to other forms of fuel which are directly linked to global prices, the issue is only in the case of petrol and diesel,” said Joshi.
Performance of oil companies
In recent quarters, state-run OMCs including Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) have booked strong profits, recovering entire losses made by them in 2022 and 2023.
The Indian refiners were hit in the first quarter of the current fiscal (Q1FY25) with their net profits declining sharply from the last year due to weak refining margins. Despite weak gross refining margins, the state-run OMCs have managed to book decent profit in the quarter, owing to declining crude prices coupled with a freeze on retail fuel prices for Indian consumers.
The companies are expected to make high profits in the second quarter, considering the slump in crude prices.
Oil import bill
India’s oil import bill was cut by 16 percent year on year in 2023-24 helped by declining crude prices, showed oil ministry data. In FY24, India’s oil import bill stood at $132 billion as it imported 232.5 million tonnes of crude oil.
Even though, India imported almost the same amount of oil in the previous year but import bill was reduced helped by lower prices. With over 85 percent import dependency, weak crude prices translate into lower import bill for India. For August 2024, the crude oil import bill of India was $11.6 billion.
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