Falling crude oil prices: OMCs may wait for a few weeks before deciding on fuel price cut: Experts

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Crude oil prices have plummeted to around $70 per barrel for the first time in 2024, raising hopes of a fuel price cut in the domestic market. A decision on price cut of petrol and diesel by the state-run oil marketing companies (OMCs), however, would be taken after reviewing the Brent price for a few more weeks, according to energy analysts.

Global oil prices have been volatile this year, breaching $90 per barrel in April due to geopolitical tensions in the Middle East, before plummeting to $70 a barrel currently due to demand concerns from the world’s largest importer, China. 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.

“Oil prices have been volatile. When you look at a few months earlier, Brent was hovering around $90 per barrel; so the prices are not very stable. Also, geopolitical risks could result in supply disruptions which can increase prices. The government might not reduce prices immediately as they would want to review prices for some more time. But if prices remain below $75 per barrel, there is a strong case for downward revision in the next few months,” said Suman Chowdhury, Chief Economist and Head of Research, Acuite Ratings & Research.

The benchmark Brent has been trading below $75 per barrel in September and closed at $71.45 a barrel on September 9 amid weakening global demand and signs of oversupply in the market. Morgan Stanley on September 9 said the global oil market is facing a period of demand weakness similar to those seen during recessions.

OPEC+ measures

The experts though are cautious of the preventive measures the Organisation of Petroleum Exporting Countries and its allies (known as OPEC+) could take to support oil prices. The oil cartel has 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.

“What we have witnessed historically is OPEC+ has been quick to take action to arrest price decline. The cuts (in production) by OPEC have been substantial but are compensated by production from Brazil and the US. In the beginning of last financial year, crude prices had plummeted to $75 but then OPEC+ came into action, which supported crude prices. They (OPEC+) have been proactive in increasing cuts to manage prices,” said Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA.

In June, the Saudi-led oil cartel decided to continue the voluntary cuts of 2.2 million barrels per day (bpd) till September 2024. Thereafter, the group had plans to phase out the supply cuts over a year, i.e. till September 2025, in a monthly exercise. OPEC said the monthly increase in production after September 2024 could be paused or reversed based on the market conditions.

Room for price cut

With state-run OMCs including Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) turning profitable and earning huge profits in the recent quarters, they are expected to pass on the benefit of plummeting crude prices.

“If crude prices are below $80 per barrel, then the financial position of OMCs improves very substantially. Therefore, there is scope for some pass through. Another important factor is the upcoming elections in some states,” said Chowdhury.

The combined consolidated net profit of the three state-owned OMCs was Rs 7,371 crore in the first quarter of this fiscal. However, the companies’ performance in the quarter was weak from last year due to low gross refining margins (GRMs) and under-recoveries on sale of LPG or cooking gas cylinders.

With elections coming up in Haryana and Jammu & Kashmir, the companies might take a call on reducing fuel prices. The OMCs had last reduced the prices of petrol and diesel across the country in March ahead of the Lok Sabha elections by Rs 2 per litre.

Volatile crude prices

⁠The year 2024 has witnessed high volatility in prices majorly on account of geopolitical tensions and demand constraints. Amid geopolitical tensions in the Middle East in the first half of the year, crude oil prices remained relatively elevated, even reaching $90 per barrel in April when Iran attacked Israel.

However, with tensions subsiding in the region and weak demand globally, crude prices slumped below $80 per barrel in late July. As demand continues to remain an issue, crude oil prices have tumbled to around $70 per barrel in September — the lowest in the year.