The surge in global crude oil prices is taking a toll domestically, as recently, the Indian crude oil basket breached the $100-a-barrel mark after nearly four months. This reflects a rise of nearly 28% from its July low of $82/bbl.
In international markets, Brent crude futures are hovering near their monthly highs of $102/bbl mark, while West Texas Intermediate (WTI) is trading around the $97/bbl level, as renewed geopolitical hostilities between the US and Iran keep the markets on edge, with uncertainty over safe transit through the Strait of Hormuz.
Threats to transportation via the alternate Red Sea route are further adding to caution in Indian oil markets, as the country imports nearly 88% of its crude oil requirements. Higher basket prices widen the country’s import bill, putting pressure on its current account deficit and mounting inflationary concerns.
Fuel marketing margins may remain under pressure
Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA, told the Financial Express that rising crude prices could add to the downside on marketing margins for auto fuels, which already stand negative, and could increase the under-recoveries on domestic LPG, which currently stands at Rs 200/cylinder.
“At the average price for the month of September till date, marketing margins on petrol are negative Rs 5/litre and diesel at negative Rs 23/litre and under-recoveries on domestic LPG are at Rs 200/cylinder,” the ICRA analyst said.
“Further, as Iran threatens to establish a new restricted maritime zone extending beyond the Strait of Hormuz, additional energy flows beyond the latter could be at risk,” Vasisht said in a separate note.
These geopolitical developments led to the domestic crude basket crossing the $100/bbl mark.
Possibility of retail hike remains open
According to Gaura Sengupta, Chief Economist at IDFC FIRST Bank, a sustained increase in crude prices above the $100/bbl mark could open up the lid for a possible rise in retail prices. If this happens, it could risk a rise in inflation, which already remains above the Reserve Bank of India’s target of 4%.
The economist notes that the sustained rise may impact companies’ margins and slow down their profit growth for Q2 FY27. “In Q1, there was a 27% jump in manufacturing companies’ raw material costs. Profit growth picked up with revenue growth accelerating. In Q2, there could be some slowdown in profit growth if sales growth slows down,” Sengupta said.
Crude spike might be temporary
However, this oil cloud could have a silver lining. Hareesh V, Head of Commodity Research at Geojit Investments, points out that crude’s rise over the important $100/bbl mark might be temporary and will largely depend on how conditions in the Middle East evolve over the coming weeks.
The analyst explained that concerns over supply disruptions may keep crude prices elevated in the near term, but as markets seek alternative supplies and producers adjust outputs, prices may calm down.
“Nevertheless, crude prices are likely to remain firm and volatile in the immediate future until there is greater clarity on the geopolitical front,” he added.
What does it mean for India?
The Geojit analyst noted that a sustained rise in crude oil prices is likely to affect consumer spending, raise the government’s fiscal burden and may pose challenges for the country’s growth outlook.
“A sustained rise in oil prices can fuel imported inflation, increase transportation and manufacturing costs, widen the current account deficit, and exert pressure on the rupee. If elevated prices persist,” Hareesh added.
Will India’s crude basket prices rise or fall?
Experts note that going forward, happenings in the West Asia conflict would be a key determinant for the trajectory of India’s crude oil basket. Easing geopolitical conditions coupled with stable supplies and weaker global demand can push the domestic oil basket below the $90 per barrel mark, added Hareesh.
On the other hand, prices may further increase if geopolitical conditions worsen. “Conversely, prices could move toward $120 per barrel if geopolitical conflicts escalate and lead to significant supply disruptions, especially from key oil-producing regions,” the analyst at Geojit said.