A surge in global crude prices driven by drone strikes on Saudi Aramco’s oil refinery in Saudi Arabia will likely hit India’s oil marketing companies Indian Oil Corp, HPCL and BPCL, potentially squeezing their marketing margins on petrol and diesel.
Retail prices of fuel may surge by Rs 5-6 per litre, as the recent spike in global crude oil prices will likely push India’s crude oil purchase costs higher. The surge in global crude prices driven by drone strikes on Saudi Aramco’s oil refinery in Saudi Arabia will likely hit India’s oil marketing companies Indian Oil Corp, HPCL and BPCL, potentially squeezing their marketing margins on petrol and diesel, said a report. “… a USD 10 per bbl rise in global crude and product prices may require OMCs to increase the retail price of diesel and gasoline (petrol) by Rs 5-6/liter in the following fortnight,” Kotak Institutional Equities said in a research note.
Indian Oil, HPCL, BPCL and other refiners may also have to battle falling refining margins and rising loss. “We do not rule out the possibility of moderation in marketing margins on auto fuels,” Kotak note said, adding: “Sharp jump in global crude prices may also put pressure on refining margins amid lower demand, besides increasing the absolute quantum of fuel and loss.”
Further, India’s trade deficit may surge too, as crude oil forms the largest Indian import. The attack has disrupted the supply of around 5.7 million barrels per day, which is around 5 per cent of the total global supply. This has shot up global crude oil prices by around 10 per cent. Consequently, the rupee has weakened more than 0.5 per cent. Saudi Aramco has said that they will restore production soon, while the US is told to increase additional supply from reserves.
There might be a glimmer of hope though. “If the production is restored in a day or two, it will not impact India much but if problems escalate and geopolitical tensions increase between Iran and Saudi Arabia, it could impact crude oil supply and prices could move upward for sometimes. Higher crude oil prices impact Indian trade balance and currency. Rupee could see further weakness towards 72-72.20,” Manoj Jain, Director-Commodities and Forex banking, India Nivesh, told Financial Express Online.
Meanwhile, the Indian government tried to calm fears of a spike in crude oil prices and disruption in supplies. The Ministry of Petroleum and Natural Gas said on Monday that Saudi Aramco officials have informed the Indian refiners that there would be no shortage of supplies to them. The oil ministry also said that it is closely monitoring the situation in consultation with Indian refiners and Saudi Aramco.
Prior to the attack, Brent crude oil spot prices averaged $59 per barrel in August, down $5 per barrel from July and $13 per barrel lower than the average from the same month last year. Amid global slowdown and geopolitical tensions, the U.S. Energy Information Administration (EIA) and the Organisation of the Petroleum Exporting Countries (OPEC) said that they expect lower oil demand in the coming quarters and hence the oil prices were also expected to fall. In that case, it could have been in favour of India to reduce its import bill but the current attack on the Saudi Arabia refinery may reverse the situation.