Gulf tensions add to concerns over economy even as Aramco assures India it will honour supply contracts despite production cuts
India’s CAD and fiscal deficits could worsen if oil prices remain at the elevated level, Shaktikanta Das warned
New Delhi/Mumbai: A record gain in crude oil prices could further aggravate India’s fiscal situation and make it tougher for the government and the central bank to effectively combat a slowdown in economic growth.
With drone attacks on Saudi Aramco’s facilities causing the biggest ever disruption in oil suppliers, India is preparing to stem the impact of the price surge. Saudi Aramco has, however, assured India that it will honour its supply contracts despite the production cuts, Indian government officials said on condition of anonymity.
India’s current account and fiscal deficits could worsen if oil prices remain at the elevated level, Reserve Bank of India governor Shaktikanta Das warned on Monday.
International benchmark Brent crude futures soared as much as 19.5% to $71.95 per barrel. Some traders are speculating that oil prices may cross the $100 mark again. Crude prices hit a record $147 per barrel in July 2008.
The surge in oil prices comes at a time when the Narendra Modi government is trying to boost the economy after GDP growth slumped to the slowest in more than six years. An increase in inflation stoked by higher fuel prices will also leave less space for RBI to cut interest rates to combat the slowdown.
“India’s crude imports averaged 4.5 million barrels per day over the first seven months of this year, of which close to 20% were imported from Saudi Arabia. As such, India is vulnerable to prolonged lower crude supplies from Saudi Arabia even though the country has some SPRs (strategic petroleum reserves) and commercial crude stocks as cushions in the short term," Jy Lim, an oil market analyst at S&P Global Platts, said in an emailed statement.
India imports more than 80% of its oil requirements and around 18% of natural gas.
Every dollar increase in the price of oil raises the import bill by ₹10,700 crore on an annualized basis. India spent $111.9 billion on oil imports in 2018-19.
“Of the cargo contracted from Saudi Aramco for September, we have already received a major part. We have been told that they will be using other ports to ship the balance, though the grades may vary," an Indian government official, one of those cited earlier, said on condition of anonymity.
“Saudi Aramco updated us that our oil cargo was successfully loaded the day before. We are waiting for that to arrive and also watching the situation," said R. Ramachandran, director (refineries) at state-run Bharat Petroleum Corp. Ltd (BPCL). The company has booked successive cargoes of 2 million tonnes each on 17 September and 22 September from Saudi Aramco.
“In case of an extended disruption, the two comparable events are the Iranian Revolution of 1979 and Iraq’s invasion of Kuwait in 1990. India suffered in both cases. In the case of the Gulf War, there was added impact of Indian workers returning home, worsening India’s balance of payments," said Amit Bhandari, fellow (energy and environment studies) at Mumbai-based think tank Gateway House.
The geopolitical event has raised fears of a rise in fuel prices in India, which in turn may stir demand for return of state control on fuel pricing.
State-run Hindustan Petroleum Corp. Ltd (HPCL) said the price of petrol and diesel at retail outlets might rise if the price of crude stays at current levels. “Price of product at fuel outlets might be impacted if crude price continues to go up by 10%," M.K. Surana, chairman of HPCL, told Reuters.
Fuel retailers fix the price of petrol and diesel based on the average of the benchmark price of petrol and diesel of the last 15 days in West Asia.
Lower oil prices in the past few years had improved India’s terms of trade. “We are comfortable till $80 per barrel and have been told that is a short-term phenomenon. Our diplomats are in talks with Saudi Arabian government," said one of the government officials cited earlier.
“We have reviewed our overall crude oil supplies for the month of September with our OMCs. We are confident there would be no supply disruption to India. We are closely monitoring the evolving situation," oil minister Dharmendra Pradhan said in a post on Twitter.
India has oil reserves equivalent to at least 75 days of net imports. This will increase further to 87 days once the second phase of Indian Strategic Petroleum Reserves, which aims to add 12 days of crude storage, is operational. This includes the refineries’ inbuilt capacity of 65 days.
A spurt in global prices will affect India’s oil import bill and its trade deficit. An inflated import bill could further widen the current account deficit, which has widened to $57.2 billion, or 2.1% of GDP, in 2018-19 from 1.8% a year ago.
A spike in crude oil price could also make chemicals used in production of plastics, tyres, paints and a host of other items costlier. Considering petrochemicals have wide applications, this could accelerate inflation. Higher fuel prices could affect energy-intensive manufacturing industries. A spike in jet fuel could put pressure on the margins of airlines, which have recently gained from a surge in airfares after bankrupt Jet Airways (India) Ltd suspended operations in April.
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 a barrel in FY17 and FY18, respectively, was $59.35 in August, according to data from the Petroleum Planning and Analysis Cell. The average price was $59.35 a barrel on 13 September. The Indian basket of crude represents the average of Oman, Dubai and Brent Crude.
While refiners are expected to benefit from inventory gains in the short term due to higher crude prices, a sustained rise would lead to an increase in the working capital borrowings and interest expense of refining firms. Besides, the gain in crude prices would lead to an increase in under-recoveries on cooking gas and kerosene, delays in the reimbursement of which by the government, as had happened in FY19, will also lead to higher working capital borrowings.
In June last year, India’s three state-run fuel retailers—Indian Oil Corp. Ltd, BPCL and HPCL—introduced dynamic fuel pricing, joining countries such as the US and Australia, where fuel prices change daily depending on global oil price fluctuations. The government had earlier effected a ₹2.50 per litre cut in petrol and diesel prices to ease inflationary pressure and boost consumer confidence.
Elections are due in Maharashtra, Haryana and Jharkhand this year and in Delhi next year.
Shreya Nandi & Gireesh Chandra Prasad contributed to the story.