India’s crude oil basket has returned to the level before the West Asia conflict started, with war premiums fast evaporating after the US-Iran peace deal.
According to Petroleum Planning and Analysis Cell (PPAC), the basket price crashed a steep 55% from a record high of $157.04 per barrel on March 23 to $70.71 on June 24, completely reversing the oil shock. The latest price is exactly the same as the pre-war level on February 19.
The war broke out on February 28, with the US launching missile attacks on the West Asian country. The oil price spike had pushed the country’s April-May crude import bill to $35.5 billion from $20.9 billion a year earlier.
The sharp correction has now wiped out the geopolitical premium created by the West Asia conflict, offering relief to India’s import bill, inflation outlook and external balances.
De-escalation Roadmap
The US and Iran has recently agreeed on a 60-day roadmap to reach a final treaty. Washington has temporarily waived oil and petrochemical export sanctions on Tehran while unfreezing targeted Iranian funds to aid the country’s economic reconstruction.
Brent crude futures slipped below $72 per barrel on Thursday, erasing all gains recorded during the conflict as crude exports from West Asia normalised.
The unwinding of the war premium has been swift. The Indian crude basket averaged $114.48 per barrel in April, eased to $106.23 in May, and has further declined to $86.31 so far in June, reflecting a fall of nearly 25% in just two months.
To partly offset mounting under-recoveries, oil marketing comoanies raised petrol and diesel prices cumulatively by around ₹7.5 per litre since May 14, marking the first major retail fuel price increase in four years.
Retail inflation increased from 3.48% in April to 3.93% in May, while wholesale price inflation accelerated to 9.68% in May from 8.26% in April, led by a sharp rise in fuel and power, manufactured products and food prices. With crude prices now retreating sharply, the unwinding of the war premium is expected to ease imported inflationary pressures in the coming months if global oil prices remain around current levels.
Macroeconomic Relief
India imports more than 85% of its crude oil requirement, making international crude prices one of the biggest drivers of the country’s import bill, inflation and current account deficit. Industry estimates suggest every $10-per-barrel decline in crude prices can reduce India’s annual import bill by around ₹13,000 crore, lowering foreign exchange outgo and easing pressure on inflation, public finances and the balance sheets of oil marketing companies.
Earlier fears of supply disruptions through the Strait of Hormuz had pushed Brent crude above $125 per barrel and physical crude cargoes to record highs. However, improved oil flows from the Middle East, abundant supply, alternative export routes, releases from emergency stockpiles and weaker demand — particularly from China — have sharply softened prices.
The Indian crude basket is a weighted average of Brent Dated (sweet crude) and the Oman-Dubai average (sour crude) imported by Indian refiners. The crude sourcing pattern has also evolved over the past three months, with the Indian Crude Basket ratio shifting from 61.02:38.98 in April to 70:30 in May and 71.02:28.98 in June.
“The retreat in crude prices is expected to provide broad-based relief to the economy after months of elevated energy costs. A lower oil import bill would help moderate imported inflation, improve the current account balance and reduce cost pressures across transport, manufacturing and logistics,” said a government official.