Home >News >India >Tensions in West Asia may push up costs for oil refiners

President Donald Trump’s rhetoric is worrying Indian oil marketing companies.

Trump’s tweet reacting to Iranian threats of reprisal—“If they attack again, which I would strongly advise them not to do, we will hit them harder than they have ever been hit before!"—has forced Indian oil marketing companies to take a closer look at their costs.

Officials from oil companies fear that the cost of operation at refineries will go up if crude prices breach the $70 per barrel mark, as is expected by markets.

Crude oil prices closed more than 4% higher on Friday than the previous close, the highest since September, after a US drone strike killed Iranian military commander Qassem Soleimani in Baghdad, fuelling concerns that escalating US-Iran conflict may disrupt oil supplies. Brent crude rose to $69.2 per barrel on Friday, up 4.39% against the previous close of $66.3 per barrel.

“Depending on the course of action planned by the Iran government and its longevity, we anticipate that the price of Brent could cross the $70 a barrel mark," said a senior official of an oil marketing company, requesting anonymity.

The situation could impact refiners on multiple levels, said the official. “Not only will crude oil prices go up, but freight and insurance charges will also be up. This will push u[ the cost of operations for us. Typically, for a refinery, at least a 1,000 crore increase is anticipated during a quarter if crude oil price climbs up," he said.

India imports more than 80% of its oil requirements. As such, 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 crude oil per day between April and November. India’s import dependency has increased to 84.5% in the period mentioned above from 83.3% in the year-ago period. In lockstep, prices of petrol and diesel at retail pumps across India rose for the fourth consecutive day on Sunday.

The price of petrol and diesel went up on Sunday by 9 paise and 11 paise respectively across major cities. A litre of diesel now costs 71.84 a litre in Mumbai and 68.51 a litre in Delhi. Petrol sold at 81.13 a litre in Mumbai and 75.54 in Delhi.

With imports of 1,634 million barrels of crude oil in FY20, a dollar increase in prices would increase the bill by roughly $1.6 billion per annum. An increase in the price of crude oil also has a significant impact on inflation as it drives monetary policy.

“Refining margins will be impacted and so would be product prices. Though we do not see product prices going up a lot in the near term, if the situation continues, it may get expensive," said another official from an oil marketing company, also asking not to be named.

To set prices of petrol and diesel, the oil marketing companies consider trade parity pricing, which is determined on the prevailing prices of the products in the international market. The pricing formula factors in 80% of import price and 20% export price of the fuel.

An analyst said the US-Iran conflict could further isolate Iran, forcing countries sourcing Iranian crude to scout for crude oil from other sources and this could have an additional impact on crude prices.

A higher crude oil price could push up prices of petrol, diesel and aviation turbine fuel, which will adversely impact the inflation print through consumer and the wholesale price indices. Crude oil and its products have a 10.4% weight in WPI.

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