Oil price hike may be delayed as crude plunges below $100

The price of petrol and diesel may not rise as much as feared because the price of crude oil has declined by about 30% after hitting an intraday peak of $139 per barrel for Brent Crude on March 7. The government, however, is evaluating all options to shield consumers from a price shock that will also fuel already high inflation, officials tracking the development said.

Although international oil prices have softened to below $100 a barrel on Tuesday for the first time since March 1, the situation is dynamic as state-run oil marketers are bleeding because their revenue losses are somewhere between ₹5 and ₹7 a litre, they said, requesting anonymity.

The price of Brent Crude dropped to an almost three-week low of $97.44 per barrel on Tuesday on slower anticipated demand due to surging Covid-19 cases in China, ceasefire talks between Russia and Ukraine, and hope for resumption of the Iran nuclear deal.

“A fuel price hike is still inevitable, but its quantum and timing are yet to be decided,” a government official said. “Certainly, there is some relief now due to softening of international oil prices.”

Pump prices in India are pegged to the international crude oil prices, but have been frozen for over four months on account of assembly elections in five states, including the politically important Uttar Pradesh, the results of which were declared on March 10.

“OMCs (oil marketing companies) are public sector companies. Hence, they are not always guided by the profit motive,” a second official said. “Revenue losses in the sale of petrol and diesel do not mean net loss, especially when their loss and gains are averaged out. Besides, they had also posted some inventory gains. Hence, moderation in retail price hike is possible.”

Persistently high inflation is a concern for the government and higher auto fuel prices would worsen it, according to experts. Retail inflation has been more than 6% in January and February, which topped the upper tolerance limit of the RBI.

“The impending fuel price hikes along with geopolitical tensions-led surge in commodity prices is expected to further weigh on the inflation trajectory,” brokerage Kotak Securities said in a March 15 report. There are, however, some mitigating factors, according to SC Sharma, an energy expert and former officer on special duty at the erstwhile Planning Commission.

“It is estimated that oil production from US shale is also likely to be higher during the coming months, giving respite to the oil prices, even if OPEC sticks to its policy of production freeze at current level,” Sharma said. OPEC, or the Organization of the Petroleum Exporting Countries, is a cartel of oil producers.

Sharma expects oil prices to settle below $100 per barrel, and be in the range of $85 to $95 per barrel in the short term.