On Tuesday, the price of the Indian crude oil basket was pegged at just a shade over $40 to a barrel. In rupee terms, the pricing of the Indian basket during the first fortnight of November 2015 was down to a four-and-half year low, according to estimates of the Petroleum Planning and Analysis Cell (PPAC) of the petroleum ministry. Effectively, ever since the diesel deregulation was initiated in October 2014, the price of the Indian basket of crude oil in rupee terms is down over 50 per cent. In comparison, the retail prices of petroleum products have barely moved downwards.
The reasons include a progressive increase in the tax component on petrol and diesel as a percentage of retail prices and oil marketing companies not cutting prices in a bid to hold on to their margins. There is also the issue of the progressive depreciation of the rupee, which limits the benefits. Just to put the current fall in the Indian basket in perspective, the government had budgeted for an average price of $70 per barrel for this financial year. So with the Indian crude basket progressively moving down to $40, considerably leg room is freed up for the government on the fisc.
In fact, when it conducted the latest retail fuel price revisions on November 15, the oil marketing companies actually ramped up products prices, with state-run Indian Oil Corporation (IOC) announcing a hike in the price of petrol by 36 paise a litre and of diesel by 87 paise in Delhi. IOC attributed this to the “current level of international product prices of petrol and diesel and rupee-US$ exchange rate” warranting an increase in prices. State-owned fuel retailers — IOC, Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) — revise petrol and diesel prices on the 1st and the middle of every month, based on average imported cost and rupee-dollar exchange rate in the previous fortnight.
The continuing slide in the oil prices comes after the International Energy Agency (IEA) said that global oil demand growth will slow in 2016 to 1.2 million barrels per day from the highs of around 1.8 million barrels per day during this current year. The IEA also said that inventories held by countries in the Organisation for Economic Cooperation and Development (OECD) were at record high levels in September. There are other triggers, including dampened demand in China.
Indian refiners will likely benefit from the recent increase in discounts on crude being offered by OPEC countries to Asian refiners. The problem for companies such as IOC is that a continuous slide in fuel prices leads to the prospect of inventory losses — a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the crude oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery for processing or the finished product is ready for selling. Including both crude oil and products, companies such as IOC keep an inventory of about 60 days.
For the second quarter of the current fiscal 2015-16, volatility in crude oil prices led IOC to report an inventory loss of Rs 5,137 crore against Rs 4,372 crore in the same quarter last year. “Physical performance, sales, refinery throughput has all done well this quarter. Only inventory loss has hit us heavily,” said B Ashok, chairman, IOC at the briefing after the results.
There could be more pain ahead for the oil firms, though. According to Nomura, after a very strong fourth quarter of the last fiscal (2014-15) and the first quarter of 2015-16, OMCs were likely to report high inventory and forex losses in the coming quarters. The key positive, though, was a sharp 6 per cent year-on-year sales volume growth in the second quarter, reflecting the higher petroleum product demand growth this year.
For the exchequer, though, a sliding crude basket promises a windfall. In July this year, the PPAC had projected a saving of over $24 billion, or about Rs 1.5 lakh crore (at $65/barrel and an exchange rate of Rs 62 to a $), in the overall import bill for 2015-16. Evidently, the final numbers would be way higher. On an average, every $1 decrease in crude oil price slashes the import bill by Rs 6,500 crore and the government’s subsidy burden by about Rs 600 crore.
The benefits are, however, limited if there is depreciation in the rupee. Every Re 1 increase in the exchange rate of dollar increases oil import bill by Rs 7,455 crore, according to the PPAC.
The government had freed prices of aviation turbine fuel or ATF in 2002, petrol in the year 2010 and diesel in October 2014. In 2014, prices of India’s crude oil basket dropped 45 per cent, from $105 per barrel to $58. The only fuel whose price has declined proportionately is the non-subsidised LPG. For the other fuels — ATF, petrol and diesel-the fall in price has been significantly much lower — at 14 per cent for petrol and 7 per cent for diesel, which was a regulated fuel during three quarters of 2014.
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