India, the worlds fourth-largest importer of crude, last week took advantage of fuel prices hovering around $79 a barrel, or nearly half the 2008 record high, to make a politically unpopular move to increase prices of fuel, including kerosene and cooking gas, to ease its budget deficit. There is stiff competition in the international export market for refiners, and Indian refiners will probably be glad to sell to the domestic market, provided the fuel hikes allow them to make a decent margin, said Victor Shum, an analyst with energy consultancy Purvin & Gertz.
In the short term, last weeks unexpectedly bold move to introduce market prices of fuels will exacerbate headline inflation that topped 10% in May. But in the long term, moving towards market pricing will ease a subsidy burden as the country looks to cut a deficit set to hit 5.5% of GDP this year.
Shares in private sector refiners Reliance Industries and Essar Oil rose 1.1% and 6.45%, respectively after the news, while those of state retailer HPCL recorded a double-digit percentage rise. Reliance and Essar have complex refineries, they can process heavy crude, which is available at cheaper rates. So they stand to gain the most from the decision, a source said.
Freeing up petrol prices will boost profits and strengthen the retail presence of Reliance and Essar, which shared almost 15% of the retail fuel market five years ago, before subsidised state firms nearly squeezed them out.
The reform move could also soften product prices in Singapore in the near term, if it prompts Indian state refiners to source fewer products from east Asia. Indias private refiners, with plants in western India, export products linked to Arab Gulf prices, while state refiners import products with prices based on the Singapore market.
If private refiners step up the supply of products to Indian markets, then the MOPAG (Mean of Platts Arab Gulf) price will get support, said Praveen Kumar, a senior consultant and head of the South Asia oil and gas team at FACTS Global energy. State firms could cut down on their purchases from Singapore and eastern markets, which would lift pressure on premiums in an already-surplus market, Kumar added.
Fuel traders agreed that Indias reform push would curb exports by the private refiners. Reliance and Essar will now withdraw supplies to public sector units and concentrate on reviving their retail network, according to an oil product trader. Despite the entry of private players, the market will still be short and state-run firms may perhaps be forced to rely on imports and occasionally resort to exports, the trader said.
Impact of fuel reforms
* What will be the impact on Indias retail oil market
Firms like IOC, Bharat Petroleum and HP, which control more than 95% of refined fuel pumps, may lose market share. RIL is expected revive all its pumps, which were shut down five years ago
* What is the extent of the price rise
Domestic fuels are taxed differently by states. If New Delhi prices are used as a reference, gasoline prices were raised by 7.3%, diesel by 5.2%, kerosene by 32.5% and LPG by 11.3%
* How would it impact the export of oil products
Exports may fall. Reliance may sell more to the domestic market, which is usually more lucrative
* Will inflation stay at elevated levels
It is very likely. The finance ministrys chief economic adviser, Kaushik Basu, said price rises would impact headline inflation by 0.9 percentage points. But forecasts suggest monsoons this year are expected to be normal, which should bring down both food and headline inflation
* How does it impact rate expectations in the markets
The price move may aggravate double digit inflationary pressures. The possibility of a strong policy hike by RBI are high, with traders expecting an inter-meeting rate hike of 25 bps and another 25 bps in the policy review
* To what extent will the fiscal deficit come down
The finance secretary says fiscal deficit in the year ending March 2011 can be slashed to 4.5%. Efforts to rein in the deficit has been buoyed by better-than-expected revenues of about $24 billion from 3G and WBA spectrum auctions