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US oil hits freak negative, but Indian fuel prices may not fall

The Indian basket comprises Sour grade (Oman and Dubai average) and Sweet grade (Brent dated) crude oil in a 76:24 ratio.

By: ENS Economic Bureau | New Delhi | Updated: April 22, 2020 1:18:00 am
crude oil, crude oil price, wto crude oil price negative, crude oil price india, india crude oil, crude oil price today, crude oil india price, crude oil news, crude oil falling, crude oil covid 19 Crude oil storage tanks at the Cushing oil hub in the US. (Reuters file)

THE WTI (West Texas Intermediate) oil price crash might not translate into a sharp lowering of prices at retail pumps for consumers in India, given that the cost of the Indian basket of crude — the average of Oman, Dubai and Brent crude — was at around $24.44 a barrel as on April 20, according to a government official.

Besides, a senior executive with an OMC said, given the high tax component in India and the government’s tendency to hike levies when input prices drop, the consumers may not get the desired relief. The government raised excise duty on petrol and diesel by Rs 3 per litre last month, the largest single hike in duty since 2012, in order to improve revenue position.

Another factor that could hamper transmission of price reduction is the sharp surge in shipment costs, which account for nearly one third of the landed cost of crude oil in India and have risen almost five-fold in April compared to last year.

Explained: What explains crude oil prices falling below the $0 mark

While determining petrol and diesel retail prices, OMCs in India consider trade parity pricing, which is determined on prevailing prices of these products in the international market. The pricing formula incorporates 80 per cent of the import price and 20 per cent export price of the fuel. After that, other inputs such as dealer commission, excise and state levies are added to the trade parity price.

The Indian basket comprises Sour grade (Oman and Dubai average) and Sweet grade (Brent dated) crude oil in a 76:24 ratio.

Rising shipping costs are another factor that increases the landed cost in India. Spot charter rates for crude tankers in early April topped $200,000 a day, according to Morgan Stanley, as against about $40,000 a day last year. The surge in rates indicates that traders are betting that they can wait out the price slide at sea.

Petrol and diesel prices have remained unchanged for over a month at Rs 69.69 per litre and Rs 62.29 per litre, respectively, in the national capital, even as crude oil prices have fallen internationally from around $30 per barrel to $21 per barrel, as government raised taxes and OMCs tried to balance their finances.

Experts say OMCs are making up for inventory losses and reductions in refining margins due to a drop in demand by as much as 70 per cent due to the lockdown and are unlikely to lower prices in response to the fall in crude prices until demand for fuel recovers.

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