As global crude tumbles, oil price cut looks imminent

The collapse of Lehman Brothers and the $50-billion take over by Bank of America of ailing Wall Street investment bank Merrill Lynch continue to reverberate. Crude oil prices tumbled by more than $5 a barrel in the international oil market.

New York?s main contract, light sweet crude for October delivery, plunged $3.95 to $91.76 a barrel. Brent North Sea crude for November delivery dropped $3.32 to $90.92. The October contract, which expired on Monday, tumbled $5.20 to close at $92.38.

India?s crude oil import price has also dropped to an all time low during 2008-09 at $91.69 and a cut in domestic fuel prices, essentially diesel and cooking gas (LPG) looks imminent.

The price of Indian basket of crude oil dropped to below $100 a barrel for the first time since April and averaged $99 a barrel on September 9. The current price of $91.69 a barrel is the lowest since April 2. It had averaged $96.52 a barrel on April 1 and crossed the $100 mark on April 7.

On his part, petroleum minister Murli Deora does not want to commit any thing at this stage. Deora said the fall in international crude oil prices from $148 a barrel in June to current $91 is unlikely to trigger a cut in domestic retail fuel prices, as the depreciating rupee has wiped away gains from easing crude prices.

However, with an eye on elections, the buzz in the political circles is that government will cut the domestic prices of diesel and cooking gas around October end. The Cabinet Committee on Political Affairs (CCPA) will meet in October to review the global crude oil price scenario and its impact on domestic fuel prices.

The last hike in the prices of petrol, diesel and LPG, in June this year, was the highest so far, when petrol became dearer by Rs 5/lt, diesel by Rs 3/lt and LPG by Rs 50 a cylinder.

?No political leader will talk about the cut so much in advance. Firstly, the falling trend in crude oil prices has to continue for some more time and stabilise. Secondly, this is more of a political call. The Cabinet Committee on Political Affairs will meet in October to take a final call,? said a senior politician in the Congress party on the condition of anonymity.

Justifying the stand of his public sector oil marketing companies, Deora said, ?Anyone will welcome reduction in oil prices but public sector companies are still losing money… The day they square off, we will consider a price cut.?

Despite the fall in crude oil prices, the three state-owned oil marketing companies?Indian Oil, BPCL and HPCL?still incur additional costs for importing crude due to devaluation of the rupee against the dollar.

?Rupee has depreciated 15 %(this month). This means oil companies have to pay more for crude imports and has wiped away the gains we made on falling oil prices,? Deora said.

The Indian rupee fell to its weakest level against the dollar since August 2006 on Tuesday, hit by concerns about capital outflows following upheaval on Wall Street (the collapse of Lehman Bros and related developments) and heavy dollar demand from oil firms and foreign banks.

Interestingly, despite the plunge in oil prices, the Asian Development Bank (ADB) warned on Tuesday that it expected oil to stay at $00 or more a barrel on a long-term basis. ?While there will be short-term fluctuations, the unmistakable long-run trend is prolonged periods of high real oil prices and pronounced price volatility,? the ADB said, adding that the days of cheap oil are over.

The three OMCs are together losing over Rs 390 crore per day on sales of petrol, diesel, domestic LPG and kerosene. The revenue loss is only marginally down from Rs 400 crore per day of last week despite the Indian basket dipping by about $8 per barrel.

Deora said domestic retail prices were pegged at $67 per barrel and a retail price cut would be considered if prices fall below this level. ?Oil companies have to square off their losses for us to consider a price cut,? he said.

The three firms, which currently lose Rs 5.21 per litre on petrol, Rs 11.55 on diesel, Rs 30.12 per litre on kerosene and Rs 300.56 LPG cylinder, are projected to lose Rs 163,497 crore in revenues in 2008-09 fiscal.