Oil prices fall as Ukraine says talks with Russia turning 'constructive'

NEW DELHI: Crude oil prices declined on Monday on hopes of easing tensions between Russia and Ukraine, after an adviser to Ukrainian president said that talks with Kremlin have become more constructive.

At 0905am, the May contract of Brent futures on the Intercontinental Exchange was at $109.12 per barrel, down 3.15% from previous close. The April contract of West Texas Intermediate (WTI) on the NYMEX also fell 3.15% to $105.89.

Analysts say that signs that diplomatic efforts are working have calmed the volatile oil market.

In a video posted online, Ukrainian negotiator and presidential adviser Mykhailo Podolyak said, "We will not concede in principle on any positions. Russia now understands this. Russia is already beginning to talk constructively."

Also, US and Chinese officials are scheduled to meet on Monday over ways to help end the war.

Analysts, meanwhile, warned that a resurgence in covid-19 cases may pose demand concerns.

Oil prices have been hovering near record highs since Russia invaded Ukraine last month. On 7 March, Brent had touched $139.13 per barrel, the highest since 2008.

High oil prices are a cause of concern for India as the country imports 85% of its oil demand. The rise in global crude prices have pushed up the price of the Indian energy basket, comprising Oman, Dubai and Brent crude. It was last recorded at $128.24 per barrel on 9 March, according to data from the Petroleum Planning & Analysis Cell of the Ministry of Petroleum and Natural Gas.

Although, the increase in crude oil prices has not been transferred to the consumers so far, market experts believe, oil marketing companies may soon raise pump prices.

On Monday, the retail price of petrol was unchanged ₹95.41 a litre, while diesel sold for ₹86.67 per litre in the national capital.

High crude prices will also impact current account deficit (CAD) to a great extend given India's import dependence for its energy requirements. An Icra report had said that CAD is likely to widen by $14-15 billion (0.4% of GDP) for every $10 barrel rise in the average price of the Indian crude basket.

"If the price averages $130/bbl in FY2023, then the CAD will widen to 3.2% of GDP, crossing 3% for the first time in a decade," it said.

Mint had earlier reported that the government is assessing the evolving geopolitical situation and will decide on cutting excise duty on fuels if the current surge in crude price lingers longer than can be absorbed by state-run fuel retailers.

As per the Icra report, if the Centre reinstates the excise duty on petrol and diesel to the pre-pandemic rates, before 1 April 2022, followed by the budgeted rise of ₹2 per litre each on unblended fuel in H2 FY2023, the estimated revenue loss to the Centre in FY2023 would be around ₹90,000 crore.

A recent report by Brickwork Ratings said high international crude oil prices remain a huge threat to the Indian economy as they accentuate inflationary pressures.

Morgan Stanley has raised its inflation estimate and trimmed GDP growth forecast for India for the upcoming financial year.

"Building in higher oil prices, we trim our F23 GDP growth forecast 50bps, to 7.9%, lift our CPI inflation forecast to 6%, and expect the current account deficit to widen to a 10-year high of 3% of GDP," it said in a report.

In January, India's retail inflation accelerated to a seven-month high of 6.01%, led by elevated prices of food and manufactured goods, breaching the Reserve Bank of India’s upper tolerance band of 6% for the first time since June.