Brent at $31/barrel: Crude dips sharply but formula limits fall in fuel prices

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March 10, 2020 6:00 AM

Big gains for India seen from declining import bill, oil companies to cut inventory gains in Q4 .

That crude imports have turned a bit costlier by a 4% depreciation of the rupee since January would not suffice to explain the gap between the rates of fall in crude price and the retail prices of diesel and petrol.That crude imports have turned a bit costlier by a 4% depreciation of the rupee since January would not suffice to explain the gap between the rates of fall in crude price and the retail prices of diesel and petrol.

On Monday, the benchmark Brent, a close proxy of Indian basket of crude, fell a steep 31% to $31/barrel – since the January 6 peak it touched in 2020, the sweet light crude dropped 50% – but India’s oil refiner-cum-marketing companies have apparently passed on to the consumer only a fraction of the price fall for their key input. Diesel prices in Delhi for instance dropped from Rs 69.17/litre on January 11, when it was at the highest level in calender 2020, to Monday’s level of Rs 63.26/litre. That was just 9% fall. That crude imports have turned a bit costlier by a 4% depreciation of the rupee since January would not suffice to explain the gap between the rates of fall in crude price and the retail prices of diesel and petrol.

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). Also, an official from an OMC has pointed out, 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). And there is the freight for on-land transportation via pipelines etc. from the west coast ports to refineries in east India, he explained. But such costs might have seen any dramatic fluctuations in recent months to justify retail product prices remaining at levels much higher that what a declining crude could have brought them to. The formula of trade parity prices does play a major role.

Even though the crude price fall doesn’t get commensurately reflected in retail prices of petrol and diesel, the softening crude could still moderate India’s fuel inflation. Usually, Indian refiners keep crude inventory level for around 15 days. The big ‘inventory gains’ reported by OMCs for the third quarter of current fiscal may be absent in Q4 or they may even report losses on this account.

IOCL’s inventory gain for the third quarter was Rs 1,608 crore while the same for HPCL was Rs 343 crore.

The softening crude will of course reduce India’s oil import bill substantially. If the Indian a basket of crude averages at $35/barrel through FY21, the country’s oil import bill in the next financial year could be around $60 billion, down from estimated $106 billion in the current year.

In a more likely scenario of average price of Indian basket at $50/barrel, the imports next fiscal could be to the tune of $87 billion.

In fact, even in the current financial year, the oil import bill could turn out to be a few billion dollars lower than the estimated $106 billion, which is based on estimated average price of $66/barrel for Indian basket of crude. The average price is likely to be significantly lower (Between January 1 and March 6, the price averaged at $58/barrel).

Brent crude oil prices plummeted 31% to $31.02 on Monday morning, recording the lowest dip since February, 2016, as Saudi Arabia decided to reduce its selling prices and Russia plans to raise crude output to gain more market share in the middle of a rapidly deteriorating global demand situation. The developments have made HSBC cut its Brent price assumptions to $49/barrel for 2020, down from its previous forecast of $60/barrel. Morgan Stanley said, “while lower oil prices will translate to lower retail prices, this positive benefit will not be fully realised as the lower oil burden on consumers will likely not fully translate into higher spending in the near term as it is occurring against a backdrop of overall downdraft in the economy and financial market volatility”.

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