With Brent touching $80, fuel prices on upswing

Source: LiveMint.com, Sept 25, 2018

New Delhi: Fuel prices in India hit all-time highs on Monday, with a litre of petrol costing more than ₹90 in Mumbai, stoking inflation fears and adding pressure on the government to cut taxes on fuel.

On Monday, vehicles in Mumbai tanked up at ₹90.08 for a litre of petrol and ₹78.58 for diesel, while in Delhi prices have hit ₹82.72 and ₹74.02 per litre, respectively. The price of Brent crude has touched $80 per barrel for the first time since 2014.

The Organization of the Petroleum Exporting Countries (Opec), which accounts for around 40% of global oil production, on Sunday ignored US President Donald Trump’s call to boost supply, prompting traders worldwide to wonder if oil prices will cross the $100-mark yet again. The high-water mark of international crude oil prices is $147 per barrel, clocked in July 2009.

Increasing tensions between the US and Venezuela, the US demanding an end to all imports of Iranian oil by early November and the rupee’s performance as Asia’s worst performing currency of the year have compounded the situation and put India, the world’s third-largest oil importer, in a difficult spot.

S&P Global Ratings said in a Monday report that the agency expected Brent price to be at $70 for the rest of 2018, $65 for 2019 and $60 for 2020.

“Rising crude prices and the recent 10-15% weakness in the Indian rupee translate into higher fuel prices for consumers in a deregulated fuel price environment, such as that in India. This puts pressure on consumers and results in higher inflation, a sensitive subject given impending federal and state elections over the next 12 months,” S&P Global Ratings wrote in its report.

The cost of the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, hit $78.01 a barrel on 21 September. On top of the refinery gate price of auto fuel, central and state taxes and dealers’ commission are added to arrive at the retail price.As a major consumer, India has been pitching for a global consensus on “responsible pricing”, to little avail. Retail auto fuel prices in India track their global prices, not crude, although they are broadly linked to crude price trends.

The central government has not yet intervened to check the fuel price rise. Every dollar rise in oil prices will raise the import bill by around ₹10,700 crore on an annual basis.

“About 30-40% of current retail fuel prices in India are composed of federal and state taxes; a lever governments tend to adjust if crude stays high and some relief in retail fuel prices appears warranted,” the S&P Global report said. “Such a tax adjustment, if sought, would also protect the government’s pro-reform stance and the financial health of both upstream oil companies and downstream oil marketing companies. However, it could have some adverse impact on the government’s fiscal deficit.”

The domestic stock market is feeling the heat of costly oil, falling rupee and global trade tensions, losing 4.69% in the last five trading sessions. In the year so far, Brent has gained over 20.5% while the rupee has slipped around 12%.

Analysts said costly oil may delay an earnings recovery. Slippage on fiscal deficit due to crude burden may impact interest rates and the government’s borrowing programme, which in turn would hurt corporate earnings.

“We believe headwinds, including tighter financial conditions, high oil prices, slowing global growth and a still muted private corporate capex recovery on legacy issues of high debt and weakened balance sheets will weigh on India’s growth momentum,” UBS Securities India Pvt. Ltd said on 5 September.

Kotak Institutional Equities Research said in a note on 18 September that the government’s taxation revenues may be at risk at higher levels of crude oil prices, in case it is forced to cut excise duty on diesel and gasoline to mitigate the impact of higher fuel prices on households and domestic inflation. High crude prices and higher inflation may also result in a shift in the Reserve Bank of India’s monetary policy stance, say analysts.

“The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group Ltd co-founder Daniel Jaeggi said at an event. “In my view, that makes it conceivable to see a price spike north of $100 a barrel.”

According to Trafigura Group co-head of oil trading Ben Luckock, Iran’s production “is going to be significantly less than it was, and probably lower than most people expected when the sanctions were announced.” He sees $90 oil by Christmas and $100 in early 2019.

India’s energy are primarily met through imports—the country imported 214 million tonnes of crude oil in 2016-17. Oil imports rose by over 25% in FY18 to $109 billion from a year ago. Costly oil prices could also worsen the current account deficit, which widened to a four-quarter high at 2.4% of gross domestic product (GDP) in the April-June period from 1.9% in the January-March quarter of 2017-18.

Of the ₹ 8 trillion of excise, service tax and GST collected last year, petroleum and petroleum products accounted for 36%, says CARE Ratings. Petroleum products accounted for around 20% of states’ tax revenues.

Also, petroleum products are unlikely to be brought under the goods and services tax (GST) in the near future, Mint reported on 21 September. States are of the view that inclusion of petroleum products under GST is unlikely to reduce their prices as states have powers to levy a tax over and above the peak GST rate.

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