Price of crude oil moving above $70 per barrel a concern: Analysts

Analysts assess current global demand for crude oil at 94 million barrels per day, around 6 mbpd lower than pre-pandemic levels.

The price of Brent crude oil moving above $70 a barrel is a sign of looming distress for Indian refineries, consumers, and the Central government, say analysts.

Brent crude oil traded above $ 71 a barrel on Tuesday in anticipation of a demand surge later this year as major economies reopen with the successful roll-out of Covid-19 vaccination programmes. It is the most popular benchmark against which around 75 per cent of the global crude oil trade is linked.

Analysts assess current global demand for crude oil at 94 million barrels per day (mbpd), around 6 mbpd lower than pre-pandemic levels. Cashing in on the demand are the Organisation of Petroleum Exporting Countries plus and their allies (OPEC+), which are curtailing crude oil production to push up prices even higher.

“As the global economic recovery is gathering pace, oil prices are rising and with artificial supply constraints created by OPEC+ there is a huge risk of a big spike. Even at these crude oil prices, retail prices are on fire and as the Reserve Bank of India (RBI) has pointed out, rising fuel prices will fan inflation and might damage growth prospects. At the same time excise and value-added tax on fuel prices massively support our public finance,” said Debasish Mishra, leader (energy, reso­urces and industrials), Deloitte in India.

It is expected that India’s demand for crude oil is expected to come back to pre-pandemic levels later this year. While that alone would not be the reason for the global higher prices, it would certainly add fuel to the fire.

Indian refineries buy crude oil at a pri­ce reflected in the Indian basket of crude. It is a mix of prices of the sour grade (Om­an and Dubai average) and sweet gr­ade (Brent Dated) of crude oil processed in Indian refineries. It is generally a bit (5-10 per cent) cheaper than Brent, but follows the same price movement trajectory.

For consumers, roughly every dollar increase in crude oil prices results in a 30-50 paisa hike in petrol and diesel prices. With petrol being sold well above Rs 100 a litre in six states, the prices are uncomfortably high for many consumers.

Analysts are expecting more nudges from the Centre to oil companies, asking them to keep a check on fuel price hikes as Assembly elections in many crucial states are due next year. A significant impact will also be on liquefied petroleum gas (LPG) or cooking gas prices, which are well over Rs 800 for a domestic (14.2 kg) cylinder. With negligible subsidy currently being borne on cooking gas, managing the household budget will be tougher if crude oil prices continue on their trajectory. It will also mean more pressure on the Centre to bring back significant subsidy on cooking gas.

Commenting on the impact of Brent above $70 a barrel, Prashant Vasisht, vice-president and co-head, corporate ratings, ICRA, said: “Such high retail prices could lead to pressure on the marketing margins of oil-marketing companies (OMCs). Either taxes need to be cut or the gross refining margins of OMCs could be constrained.”

This has support from Bhanu Patni, senior Analyst at India Ratings & Research. She said, “Higher crude oil prices will directly impact fuel prices, which are at their peak, in the absence of any steps taken to reduce taxes. At present over 50 per cent of the final fuel price is in terms of central or state tax collections.”

“This will also limit the ability of the OMCs to earn a higher marketing margin,” she added.