Crude oil headache back with a vengeance as prices soar

After a four-year hiatus, the crude oil bogeyman seems to have made a comeback to haunt India.

Crude oil is dispensed into a bottle in this illustration photo June 1, 2017. (Photo | Associated Press)

NEW DELHI: With marketing margins of oil marketing firms (OMC) drastically reduced in the run up to the Karnataka polls, experts see no quick end to ongoing fuel price hikes as global crude rates hit $80 per barrel on Thursday. According to sources, OMC marketing margins have been decimated due to the 19-day price freeze ahead of the Karnataka polls when prices were kept static, but global benchmark rates soared.

In fact, after the 19-day price freeze began on April 24, benchmark international rates for petrol (used to calculate daily domestic prices) have gone up from $78.84 per barrel to $83.30 and diesel benchmarks from $84.68 per barrel to $88.93 currently. This has resulted in a more than 80 per cent decline in marketing margins, bringing them down to just around Rs 0.3-0.5 per litre. OMCs are estimated to have taken a hit of more than Rs 30 crore per day during the freeze.

With global rates showing no signs of moderating, OMCs are expected to “recoup those losses over the next few weeks in a staggered manner” according to a senior oil industry executive. This could result in a cumulative hike of as much as Rs4 per litre if OMCs get their margins back to April 24 levels assuming crude oil price stay at current rates. A Kotak Institutional Equities research note observed that “OMCs are required to increase retail prices of diesel by a steep Rs 3.5-4 a litre and gasoline (petrol) by Rs 4-4.55 per litre in the coming weeks…” to get back to normal marketing margins of around Rs 2.7 per litre.

Any price rise of this quantum will have a sharp impact on already firming inflation and hit consumer pockets in a jam-packed election year. High crude rates are also likely result in a widened current account deficit, which could also affect an already depressed Rupee, which is at a multi-year low of 67.72 per dollar.