Home / Economy / Oil companies need to undertake consistent price hikes in coming weeks to cut losses: Experts

Oil companies need to undertake consistent price hikes in coming weeks to cut losses: Experts

The direct impact of a 10% increase in fuel prices on inflation is estimated at 23 basis points.Premium
The direct impact of a 10% increase in fuel prices on inflation is estimated at 23 basis points.

  • Petrol and diesel prices on Monday were hiked 30 paise and 35 paise respectively, taking the cumulative hike to 4-4.10 per litre in just a week. According to research reports, current global crude oil prices warrant an increase of 15-20/litre

NEW DELHI: Domestic fuel prices will likely continue to move higher in the coming weeks, given that oil marketing companies (OMCs) are required to raise retail rates to minimise losses accumulated over the last four months when international oil prices surged, especially in the aftermath of the Russia's invasion of Ukraine.

Notably, India's retail has inflation breached the Reserve Bank of India’s upper tolerance band of 6% for two consecutive months. 

JY Lim, analyst at S&P Global Commodity Insights, said a soaring consumer price index continues to be a cause of concern for the Indian economy, and high inflation means that the country has less leeway to boost its economy.

“We note that OMCs need to continue to take consistent price hikes in the coming weeks to be able to return to the black as crude prices are likely to remain volatile owing to geopolitical concerns," a Kotak Institutional Securities report said.

Petrol and diesel prices on Monday were hiked 30 paise and 35 paise respectively, taking the cumulative hike to 4-4.10 per litre in just a week. According to research reports, current global crude oil prices warrant an increase of 15-20 per litre.

The Kotak report said that refining margins have been volatile in recent weeks due to concerns over demand destruction due to the resurgence in Covid-19 cases across China, other Asian and EU countries and higher cracks for petroleum products following reports that the European Union was mulling a ban on Russian energy imports.

Before the Ukraine crisis, the global oil market was expected to record a surplus of 0.8 mbpd in 2022 as per estimates of the US Energy Information Administration, but sanctions related disruptions in oil supply from Russia is now likely to affect this balance, brokerages said.

According to HDFC Bank, Russia exports nearly 6 million barrels per day of oil and oil products, but if this entire supply goes off the market, Brent could rise above $200 a barrel.

“Furthermore, OPEC+ is already struggling to meet the production quotas, which suggests that the oil market could remain tight. In Feb-22, OPEC+ missed its production target by over 1mbpd (million barrels per day)," the report said.

The authors of the report, however, said they don’t expect Russia's entire supply to go completely go off the market.

“We believe the EU is extremely unlikely to be able to approve a complete ban on Russian energy supplies, given its significant dependence on Russia," analysts at Kotak Institutional Securities added.

The direct impact of a 10% increase in fuel prices on inflation is estimated at 23 basis points (bps), as per the HDFC Bank. It said inflation could increase by 40bps over a period of time, as a result of the indirect impact.

“We estimate headline inflation to average around 5.5-5.7% in FY23," the report added.

India among the major crude oil importers, buying over 80% of its requirement. Therefore, an oil supply shock is likely to have a significant impact on the domestic economy. On the consumption side, a 1% increase in fuel spending could drag down non-fuel expenditure by 0.7%. The impact on overall private consumption growth is estimated at -0.3%.

A $10 per barrel increase in oil prices could widen India's current account deficit (CAD) by 40bps. The report has estimated CAD at at 2.6% of GDP in FY23.

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