As the US oil futures continued to trade in a historic sub-zero level for the second consecutive day on Tuesday amid a looming storage crisis and a demand slump causing the global benchmark Brent crude to hover around $20/barrel, analysts see aggregate gains for the Indian economy and the country’s stressed government finances.
India’s crude import bill may decline by a massive $57 billion or 57% year-on-year in FY21 if the Indian basket price remains subdued at around $25/barrel through the current fiscal year, in what could give a big relief to the country’s current account. The price of the Indian crude oil basket, which stood at an average of $64/barrel in January, is now around $20.
Though not immediately and necessarily to the same degree, benign crude prices will over time reflect on the retail prices of decontrolled auto fuels diesel and petrol and exert a sobering effect on the country’s fuel inflation and thereby overall inflation. For a country that depends on imports to meet 85% of its crude oil requirement, the benign prices of the commodity will also have another beneficial outcome as reduced subsidy bills.
While oil subsidy has been contained a bit – it is budgeted to be Rs 40,915 crore in FY21 against Rs 60,269 crore in FY15 — the subsidy on nitrogenous fertiliser urea (for which refinery output naptha and natural gas are feedstock) continues to be a heavy burden on the fisc (FY21 urea subsidy is budgeted at Rs 47,805 crore).
Also, a big fall in crude prices may prompt a resource-hungry government to again resort to fuel excise duty hikes to somewhat salvage its weak tax revenues. Taking advantage of benign crude, on March 14, the Centre hiked the taxes (SED and road and infra cess) on diesel and petrol by Rs 3/litre each and later, it used the Finance Bill 2020 to create room for increasing the tax on the auto fuels by up to Rs 8/litre. Every one-rupee duty on petrol and diesel translates into revenue of about Rs 14,000 crore annually for the Centre. States will also benefit from these tax hikes as they levy sales tax/VAT on the fuels on an ad valorem basis on the price inclusive of Central taxes.
While that is the big picture, individually, the fall in crude prices will hit a few companies in India, including state-run oil producers ONGC and Oil India. ONGC, which produces about 65% of domestic crude oil, is likely face under-recoveries to the tune of $1.8 billion in FY21, if the Indian basket of crude averages in the year at $25/barrel. This assumes that ONGC produces and sells 24 million tonnes (MT) of crude oil in the current fiscal, roughly the same as last year.
ONGC may ask for a subsidy to partly cover its rising costs; if the government accepts this request, then that will have a negative bearing on the Centre’s finances. Given the extra fiscal stress that the economic slowdown (which hit tax collections) and the COVID-19 expenses have caused, the Centre may not pay heed to ONGC’s demand.
ONGC’s per-barrel production cost is in the range of $35-$40. The Brent crude has a direct bearing with the rate at which ONGC sells crude to Indian refiners. ONGC is also facing under recoveries from selling gas after the government recently slashed the price of domestic gas by 26% to $2.39 per million British thermal units (mmBtu), whereas the firm’s output cost is around $3.8-$6.6/mmBtu.
In the light of the recent slide in global crude prices, ONGC is set to “adopt a balanced approach towards capital spending,” and expects the government to take favourable policy measures to boost the company’s performance. “The decline in crude prices has additionally created a need for us to carry out detailed review of activities to look for opportunities to optimise operating costs to preserve liquidity,” the company said in a statement. ONGC is understood to have already started making a detailed strategy “to get over this situation if the crisis prolongs”.
Of course, the retail prices of petroleum products are not linked directly to crude oil price but are determined on the basis of a formula of trade parity pricing (80% weight to landed cost of notional import of petroleum products and 20% to export price of petroleum products).
Though crude prices have fallen 39% since March 16, retail prices of petrol and diesel have remained unchanged in this period. Diesel prices in Delhi fell to Rs 62.44 per litre on March 15, 3.6% lower than a month ago. Crude prices had fallen 46% in that period.
So, the decline in the prices might not strictly correspond to the decline in crude prices. Also, there is usually a lag between the time the contract price for a certain quantity of crude is fixed and it is delivered at the refinery gate – this is even 40 days when crude is purchased from distant sources like the US or South America (India has diversified its sourcing of crude in recent years, cutting the relative share of the West Asian countries, the conventional sole sources).
According to an FE analysis, India’s oil imports may fall to $43 billion in FY21, against $100 billion this fiscal, if the price of domestic crude basket averages $25 per barrel. Similarly, the import bill may fall to $60 billion, if the crude averages at $35 per barrel through the year. In case price goes up to $45 a barrel, the import bill may drop to $76 billion in FY21.
According to Reuters, global benchmark Brent crude fell sharply in response to the collapse of demand following reduced economic activity on Tuesday; for June delivery was down $5.25, or 21% at $20.32 per barrel.
US West Texas Intermediate (WTI) crude for May delivery traded at minus $7 a barrel by 0955 GMT, up $30.63 from Monday’s close when the contract settled at a discount of $37.63 a barrel. The slump in the US contract was exaggerated by the looming expiry late on Tuesday of the front-month contract for delivery of oil in May when the lack of storage is set to be particularly acute.