Indian Consumers Should Brace For More Hikes In Diesel, Petrol Prices

That’s because oil marketers are struggling to recover costs after the government increased taxes to shore up revenue during the slowdown. The only way for these companies to protect margins is by increasing prices at the pump.

Retail prices have been rising since May-end as crude recovered from a record plunge in April. Petrol has turned costlier by Rs 10.39 a litre and diesel by Rs 12.13, to Rs 86.70 and Rs 78.34 a litre, respectively. Petrol in Mumbai is just Rs 4.6 a litre away from the all-time high, while diesel is Rs 1.76 under its record level.

Here’s India oil price conundrum explained in charts:

First, Oil Prices Plunged…

India’s fuel prices are based on a basket of prices across markets and varieties—Brent, Dubai Crude and U.S. Nymex Crude. The Indian crude basket stood at $69.95 per barrel on Jan. 6 before tumbling to a low of $16.19 a barrel on April 28, a week after the Nymex Crude dropped to negative territory.

The benchmark prices of crude tumbled due to a global supply glut on account of excess production by certain countries and falling demand during the coronavirus outbreak.

But cheaper global prices didn’t show up in prices at the pump in India.

Why Indian Consumers Didn’t Benefit

Oil marketing companies had been adjusting their prices daily till the beginning of lockdown period in March. But through April and May, prices remained unchanged even as global crude oil prices tumbled and the Indian crude basket slipped below $33.49 a barrel.

That’s because in March and May, the central government used the fall in global oil prices to hike taxes and shore up its revenue. Prime Minister Narendra Modi hiked excise duty on petrol and diesel by Rs 3 each on March 14, and then by Rs 10 and Rs 13, respectively, on May 6.

This entire fuel price hike was absorbed by the oil marketing companies as their supply costs had fallen. So, retail prices remained unchanged—petrol at Rs 76.31 a litre and diesel at 66.21 in Mumbai—in April and May. As long as the cost of Indian crude basket remained below $33 a barrel, oil marketers could absorb the tax cost. But that price was breached on May 28.

Gains Capped For Oil Retailers As Well

The volatility in crude also meant that there was a steep deviation in the correlation between Indian basket of crude and Brent, the Asian benchmark. The spread that has remained around $5 a barrel over the past six years swung wildly in March-April.

Indian crude that was at a premium of $13.6 to Brent on March 9 fell to a discount of $10.55 on April 2.

This high divergence with Brent lasted from early-March till end of May and can be attributed to a shift in sourcing. India has increased crude purchases from the U.S. tenfold, from 25,000 barrels a day when it began buying U.S. crude in 2017 to 2,50,000 barrels a day by February this year.

Indian oil marketers used the discount to Brent to recover some of the inventory losses suffered in January-March when they bought crude at higher prices. Usually, if market price of crude falls, refiners who bought stock at a higher rate end up selling it cheaper, leading to inventory losses.

But the increase in excise duty in May capped their gains.

The Crude Surges Again

Brent crude has more than doubled since April low as OPEC+ alliance agreed to record output cuts of nearly 10 million barrels a day through July as the coronavirus pandemic decimated energy demand. The group of 23 nations, led by Saudi Arabia and Russia, aims to support a rally that sent crude price to $42 a barrel.

Indian fuel retailers started adjusting daily fuel prices on May 29. The Indian crude basket has since risen 30%, while oil marketers have hiked prices of petrol and diesel by 13.60% and 18.3%, respectively.

Dollar-rupee fluctuations also go into daily adjustment of retail prices. But oil marketers are likely to increase prices as they are sitting on inventory losses. Unless, the government reduces taxes or crude falls again.