Petrol, diesel prices to be slashed by ₹3-5/litre around Diwali? Here's what brokerage says

Following the recent cut in domestic liquified petroleum gas (LPG) prices, the government may cut petrol and diesel rates by ₹3-5/litre around Diwali given key state elections start from November-December 2023. According to domestic brokerage firm JM Financials, this cut in fuel prices should mostly happen via reduction in excise duty or value-added tax (VAT), given the oil marketing companies (OMCs) lose out on auto-fuel marketing business at the current high crude prices.

Oil producers Saudi Arabia and Russia extended their voluntary oil output cuts to the end of the year which resulted in a sharp surge in international crude prices - reaching a 10-month high peak earlier this week.

Also Read: Brokerage downgrades OMC stocks as Brent above $90/bbl plays spoilsport; maintains ‘buy’ on BPCL, HPCL

Last week, the government cut the price of the domestic 14.2 kg LPG cylinder by ₹200/LPG cylinder for all 330mn domestic LPG consumers starting from August 30, in a bid to provide relief to the common man from the recent surge in inflation, said the brokerage. ‘’The burden of this LPG price cut will be borne by the government, however, this may increase OMCs’ working capital given the usual lag in government compensation,'' said JM Financials.

‘’Further, there is high expectation that government may also cut petrol/diesel price by INR 3-5/litre around Diwali given key state elections start from November-December 2023,'' added the brokerage.

Brent at $90/bbl: Impact of high crude oil prices on petrol, diesel rates

Saudi Arabia and Russia on Tuesday extended their voluntary oil cuts till December 2023, by 1 million barrels per day (bpd) and 300,000 bpd respectively. These are on top of the April cut agreed by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) running to the end of 2024. 

Investors had estimated Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected. After the shock announcement, benchmarks Brent crude futures rose by $1.04, or 1.2 per cent, to settle at $90.04 a barrel, closing above the $90 mark for the first time since November 16, 2022. 

US West Texas Intermediate (WTI) futures had gained $1.14, or 1.3 per cent, to settle at $86.69 a barrel on Tuesday, also a 10-month high. Two days later, Brent crude futures today trades around 0.2 per cent lower to $90.41 a barrel, while US WTI futures is 0.2 per cent lower at $87.36 as uncertain outlook for demand from China overshadowed the tightening supply in markets.

Back home, as a result of high crude rates trading around $90 per barrel levels, OMCs including Indian Oil, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) may be forced to lift the freeze on petrol and diesel prices on rising international crude prices.

OMCs did not significantly increase the retail prices last year even after crude reached a peak of $140 per barrel in March 2022. Due to this, the oil refiners registered losses as petrol and diesel rates have been unchanged since April 2022.

However, the central government can force OMCs to cut petrol and diesel prices as their balance sheets have largely got repaired due to stronger profits in the current fiscal. Hence, JM Financials expects the government to cut petrol and diesel prices around Diwali that nears the onset of state elections, in the run up to general elections of 2024.

How high crude prices alters inflation trajectory

Analysts say that consumer behaviour plays a critical role because when fuel prices rise, consumers may cut back on discretionary spending, which can impact economic activity. Reduced consumer spending influences the inflation dynamics, especially in sectors heavily dependent on consumer demand.

Also Read: From high inflation to import bill - the domino effect of rising crude oil prices on Indian economy

India is the fourth-largest global energy consumer behind China, US, and the European Union. The country is also a net importer of crude oil and fulfills as much as 85 per cent of its energy needs through imports.

Surprise changes in oil prices can also influence the price and wage-setting in the economy by altering the inflation expectations of firms and households, and so, domestic economic activity falls on impact of such a shock. However, the impact is felt only for a short duration as it reverts to mean quickly, according to the Reserve Bank of India (RBI).