Oil puzzle: Retail prices of petrol likely to cross Rs 85-90 in near future

Retail prices of petrol and diesel reached record highs on Monday, prompting Petroleum Minister Dharmendra Pradhan to say that the government is exploring all options to soften the blow on consumers. But a Business Standard analysis shows the government is left with no option but to cut excise duties, or prod states to reduce the value-added-tax on petrol and diesel.

If taxes are kept unchanged, the retail price of petrol in Mumbai could cross Rs 90 per litre in the near future if crude oil touches $85 per barrel. This is based on the government’s statement that the crude oil price increase could add $50 billion to India’s oil import bill in 2018-19.

The retail price of petrol in Delhi may reach Rs 85 a litre, while that for diesel reach Rs 73 a litre. 

The analysis assumes a stable rupee, with the dollar–rupee exchange rate at 2017-18 levels. If the rupee is weaker—as is the situation today—retail prices will go higher than this.

The situation can become worse, as analysts in investment banks such as Bank of America-Merrill Lynch, Jefferies, and Morgan Stanley last week forecast oil prices would cross the $90 mark in 2018. 

Some said it might even breach the $100 per barrel level.

Even those analysts who do not subscribe to this calculation have voiced concern on inflation, especially if excise duties are not cut. Headline inflation will be 5.4 per cent while the combined fiscal deficit (centre and states) will touch 6.2 per cent if oil averages $80 over the year, says Pranjul Bhandari, chief India economist at HSBC Global Research, in a report.

“The government would have to counterbalance between the fiscal and inflation risks,” Aditi Nayar, principal economist at ICRA, said in a report earlier this month.

“A fiscal response may be forthcoming via eventual excise duty cuts” if the oil price crosses $80 a barrel, the report added.

A recent report by CLSA, a global brokerage firm, suggests the short- as well as long-term impact of high oil prices on emerging markets like India will be inflationary though it will be deflationary in the long term for advanced economies.

Calculating backwards, if the crude oil import bill is $130 billion, the crude oil price (the Indian basket) will average $81 a barrel over 2018-19. 

With the average price at $71-72 in April-May, crude oil prices in the coming months may reach $85-90 a barrel (a barrel contains a little more than 159 litres).

A recent report by Kotak Institutional Equities said to maintain the margins of oil-marketing companies, retail petrol prices now need to be raised by Rs 4.6 per litre and diesel by Rs 3.8 per litre, when the price of oil is $77 per barrel.

US sanctions on Iran, political crisis in Venezuela, instability in Libya and Iraq, the imminent public offering of Saudi-owned oil company Aramco, supply moderation from US shale oil basins and an increasing growth in demand from emerging markets are pushing oil prices upwards.  “For 2018, oil demand growth is forecast to increase by around 1.65 million barrels per day (mb/d) to average 98.85 mb/d. Growth was revised higher by 25,000 barrels per day compared with last month’s assessment,” Organisation of the petroleum exporting countries noted in its May 2018 monthly oil report. 

To fetch a better price for a portion of Saudi Aramco to be offered to the public at end of 2018, the kingdom wants to elevate oil prices in the near term, reports say. 

On supply side, Venezuela’s supply has come down from 2.2 million barrels per day in 2016 to 1.4 mb/day in April 2018, says the OPEC report.