A sample of crude oil. (REUTERS)
A sample of crude oil. (REUTERS)

Why fuel prices are high despite a decline in crude prices?

  • In India, retail fuel prices are linked to the price of those in global markets, not that of crude per se
  • Since crude accounts for 90% of the cost, it’s the biggest determinant of retail fuel price

Higher gasoline cracks and an increase in fuel duties have resulted in petrol prices remaining high despite a sharp fall in crude prices beginning July.

The price of Brent crude has fallen 10.57% since 1 July, while petrol price in Mumbai rose 2.45% in the same period, according to Bloomberg data. In August alone, crude prices fell 8.68%, while petrol prices declined a mere 0.95%.

The primary reason is the improvement in gasoline cracks from their lowest level of $2 per barrel in January to $11 in August, according to Yogesh Patil, senior research analyst at Reliance Securities.

“In the case of diesel, cracks have improved by $4.5 per barrel over the same period," he said.

“Along with this, the government has raised duty on petrol and diesel by 2 per litre in July," said Patil.

The crack is an industry term for the cost of separating the component products of crude oil, including gases such as propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel, and heavy distillates like grease.

“Based on our analysis, every $1/bbl fall in Brent crude or product prices leads to a 0.45/lt reduction in product prices. We see diesel cracks remaining strong which will be backed by IMO (International Maritime Organization) 2020, while petrol cracks will sustain at same level. If the price of crude continues to fall, then we expect a reduction in petrol prices," Patil said.

Ships must shift to fuel oil with sulphur content below 0.5% by January 2020, against the present 3.5%, according to guidelines issued in October 2016 by IMO.

With the impending shift to low-sulphur fuel oil, the demand for it is expected to rise, boosting oil companies’ gross refining margin (GRM), which is the realization from turning every barrel of crude oil into finished products.

The pricing formula of an oil marketing company (OMC) takes an average of 15 days to work through, which explains the reason for lower crude prices not reflecting immediately in pump prices, said a senior executive of the company on condition of anonymity.

“Also, our fuel taxes are fixed and not percentage-based. So, whatever the product price may be, the taxes keep the product prices higher than expected," said a finance executive from an OMC, on condition of anonymity.

In India, retail fuel prices are linked to the price of these fuels in global markets, not that of crude oil per se. As such, the demand-supply situation of finished products in global markets has some effect on the retail price of auto fuel here. Despite that, crude oil, which accounts for about 90% of the cost of these refinery products, is the biggest determinant of retail fuel price.

State-run fuel retailers Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd, and Hindustan Petroleum Corp. Ltd switched to daily price revision from a fortnightly pricing system in June 2017. Crude oil cost $46.96 a barrel then.

Under dynamic pricing, fuel prices are revised at 6am daily at petrol pumps. To set the prices of petrol and diesel, Indian oil companies consider trade parity pricing, which is determined on the basis of prevailing prices of these products in the international market.