Crude, cracks and tax cocktail pushes India's fuel users to the brink

Petrol price climbed to an all-time high of Rs 87.30 a litre in Delhi on Tuesday, while diesel sold at Rs 77.48 a litre in the National Capital.
A recovery in international prices is expected to keep petrol and diesel prices firm in the country. 

This, coupled with the recent inching up of crude oil price to beyond $60 a barrel, has locked domestic petrol and diesel rates at record levels.

Petrol price climbed to an all-time high of Rs 87.30 a litre in Delhi on Tuesday, while diesel sold at Rs 77.48 a litre in the National Capital. 

In Mumbai, petrol sold at Rs 93.83 a litre while diesel was at Rs 84.36. This is the highest rate at which auto fuels have ever been sold in Mumbai.

Brent crude traded at $61.25 a barrel on Tuesday, steadily rising from $56.35 on February 1. The price recovery is steeper on a longer horizon, coming back from the lows of $19.33 a barrel recorded in April 2020. 

According to India Ratings and Research (Ind-Ra), the price hikes are supported by a gradual revival in global demand and continued production cuts by major suppliers.

Crude oil purchase by Indian refineries is reflected in the Indian basket of crude oil, which has a 25 per cent weightage of the Brent sweet grade crude oil marker and 75 per cent weightage of Oman and Dubai sour grade crude.

Another factor driving prices are the low margins that refineries are currently making. 

It is expected that even if crude oil prices stabilise, refinery margins are likely to go up in the near term with Covid-19 lockdowns being relaxed and mobility increasing again. 

According to N Vijayagopal, director (finance), Bharat Petroleum Corporation (BPCL), product cracks had declined significantly in the last few months and are now recovering.  Cracks are the gain per barrel of crude oil processed that is accrued to a refinery making petroleum products.

For BPCL, petrol cracks had declined to $2.97 a barrel in the quarter ending December 2020 from $8.93 in the quarter ending December 2019. 

BPCL’s diesel cracks had fallen from $15 a barrel in the September-December quarter of financial year (FY) 2019-2020 to $4.1 in the same quarter this FY.

Vijayagopal said there has been a slight increase in petrol and diesel processing margins (cracks) during January 2021. For BPCL, diesel cracks (in January) stood at $5.25 a barrel while petrol cracks improved to $4.17 a barrel.

These margins are expected to improve further, and this will drive up prices unless mitigated by a tax cut or a moderation in crude oil prices. In India, these higher prices are heavily driven by high taxation levied by the central and state governments.  “Petrol and diesel prices depend on international commodity prices and the actual product price, within the retail price is just 25 to 30 per cent. The rest is central and state taxes,” HPCL chairman and managing director M K Surana had said recently.

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