BackGlobal tensions may put pressure on oil import bill
Experts say Brent crude price could rise further and cross the $70 a barrel markConsidering India imports more than 80% of its oil requirements, any increase in crude oil price is always a cause for concern
PremiumNEW DELHI : Crude oil prices jumped more than 4% on Friday, the highest since September, after a US airstrike killed a key Iranian military leader in Baghdad, fuelling concerns that escalating tensions between the Persian Gulf nation and the US may disrupt oil supplies.
Brent crude price rose to $69.2 per barrel during the day, up 4.39% against the previous close of $66.3 per barrel.
“After easing of tensions between the US and China, and output cuts undertaken by OPEC and its allies, crude oil prices were already on a rally. Now, coupled with the US airstrike, the price of Brent has the potential to increase and cross the $70 a barrel mark in the coming few days, depending on the retaliation planned by the Iran government and the longevity of the feud continued by both the countries," said Care Ratings in a note on Friday.
Considering India imports more than 80% of its oil requirements, any increase in crude oil price is always a cause for concern.
In the current financial year, India has imported 4.5 million barrels of oil per day between April and November, while its import dependency, based on consumption, has increased to 84.5% compared to 83.3% a year-ago.
With imports of 1,634 million barrels of crude oil in FY20, every dollar increase in crude prices will increase India’s annual oil import bill by around $1.6 billion. Besides, increase in oil prices has a significant impact on inflation.
“This will not only push up our oil import bill but our working capital needs too," a senior official from a fuel retailer said on the condition of anonymity. Any increase in the price of crude oil will also impact the wholesale price index (WPI) inflation commensurately. Crude oil and its products have a weight of 10.4% in the WPI.
Of this, crude oil and natural gas have a weight of 2.4% and mineral oils around 8%. With the exception of LPG and kerosene (with a combined weight of 0.83%), the rest will be driven by market forces.
To set prices of petrol and diesel, Indian oil companies consider trade parity pricing, which is determined on the prevailing prices of the products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. To the trade parity price, other elements like dealer commission, excise duty, and value-added tax are added to arrive at retail prices.
In Delhi, a litre of petrol on Friday was at ₹75.35 while diesel was at ₹68.25 per litre. In Mumbai, retail petrol prices were at ₹80.94 a litre, and diesel at ₹71.56 a litre.
“Given the trend in oil prices, it is likely that fuel prices will increase in the next few days as well. With the upcoming union budget, which will be announced in a month’s time, increase in oil price can also pose a challenge for the government on the fiscal side, and the assumption made for the year," added Care Ratings in its note.
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