Boost for govt spending on welfare, infrastructure as crude prices plunge

A sharp fall in global crude benchmarks will reduce costs of fuel, both oil and gas, to Indian consumers if State-run oil companies choose to pass them on. Alternatively, it will help Indian Oil, Bharat Petroleum and Hindustan Petroleum boost profitability at the pump even as the margins from processing crude into fuels decline.

The plunge in crude oil levels to near three-year lows this week at $70/bbl, a $20/bbl decline in five months, will also come as a relief to a government which is boosting spending on welfare and infrastructure.
 

“Low oil prices can help lift the burden on the import bill of India, in line with the budgetary aim to reduce the Centre's fiscal deficit to 5.1 per cent of GDP in FY25 from 5.6 per cent in the previous financial year,” said Sourav Mitra, senior practice leader and director consulting, CRISIL Market Intelligence and Analytics.
 

Crude oil futures dipped to the lowest this week in nearly three years, wiping out all the gains made earlier this year after seasonal demand for crude from China did not materialise as expected. Traders cut their net long position — the difference between bullish and bearish bets — to the lowest level in the week to September 3 since exchanges began compiling such data in 2011, Oilprice.com reported, citing exchanges’ data.
 

US bank Goldman Sachs revised its forecast downward for 2025 by $5/bbl to an average $77/bbl, and Morgan Stanley predicted $75-$78/bbl, with both expecting that the crude market will be oversupplied and see prices leaning lower over 12 months.

 

“We have seen crude above $90/bbl in April and now close to $70/bbl,” said Bhanu Patni, associate director, India Ratings and Research. “To arrest the decline, we could see some production cuts from Opec+ as was done in the past,” Patni added.

Opec has already announced postponing withdrawal of the 2.2 million b/d (barrels per day) in voluntary cuts it took to December from October. That could send oil prices snapping out of their recent downturn, pushing from their sub-$70 levels back into the $80-$90/bbl range, UK-based publisher Energy Intelligence reported, citing US EIA (Energy Information Administration).
 

“We expect prices will stay generally soft through the autumn, averaging $75-80/bbl in December and lower in 2025,” Mitra said. “Oil prices may not be heading higher anytime soon as China's appetite shows signs of slowing and the US economy may face some demand pressures, but robust outlook in some other demand centres, such as India, could provide a floor to the market,” Mitra added.
 

Even a typically bullish Opec this week revised downward its global oil demand forecast by 80,000 b/d. The US EIA lowered its global oil demand growth outlook for this year and next, seeing Chinese oil demand growing by just 100,000 b/d this year compared to Opec estimates of 559,000 b/d year-on-year (Y-o-Y), on average, in the second half of 2024, reflecting a wide chasm between producer cartel Opec on the one hand, and independent agencies like EIA and Paris-based International Energy Agency on the other.
 

“Since marginal cost of production is at $70/bbl, we don't expect Brent to remain at current levels for long,” said Swarnendu Bhushan, co-head of Institutional Equities, PL Capital-Prabhudas Lilladher. “We expect Brent to be in $75-85/bbl in the medium term,” Bhushan added.
 

Pump prices
 

A change in pump prices is a political decision, something possible because of impending polls in Maharashtra and Haryana, industry officials said. Moreover, lower fuel rates may bring down overall inflation, prompting the RBI to consider softening interest rates.
 

But the impact of a price cut at the pump may hurt the overall profitability of OMCs because of lower profits from refining.
 

The government will monitor the situation for a few days and see how oil prices move, oil secretary Pankaj Jain told reporters on the sidelines of a green hydrogen event in Delhi today. Replying to a question on if fuel prices will be lowered, Jain said that the power to change rates rests with oil marketing companies.
 

At current oil prices, oil marketing companies (OMCs) would be making Rs 12-15/litre as gross marketing margins on petrol/diesel, Bhushan said, adding: “We do anticipate that the government may cut down on retail pump prices.”

 

“GRMs (gross refining margins) have come down from the highs seen in FY24 on account of the fall in crude and product spreads, which is being compensated by the marketing margins for OMCs,” Patni said. “There could be some wait-and-watch on retail prices by OMCs, and if low crude levels sustain for a longer period, we could see some price cuts,” Patni added.
 

“All three major OMCs registered a weak first quarter in FY25 due to lower refining margins. Further, the reduction in pump prices also adversely impacted their marketing margins. Now, with crude at the $70/bbl level, the marketing margins are likely to enhance, especially if there is a lag in pump price cuts,” Mitra said.
 

Changing times
 

The sharp declines in prices of both the European and US benchmarks matter more for India now than they did a few years back because a large portion of the $133 billion in crude that India imported last financial year and the $13.3 billion in LNG imports are pegged to Brent, and some portion of the crude to WTI (West Texas Intermediate).
 

The ICE November Brent contract, European crude benchmark, declined by nearly 4 per cent to $69.2/bbl — the first time Brent went below $70/bbl since December 2021. The decline in Brent is significant because it has become a key benchmark for India in the last three years.
 

That was not the case in the past. Before Russian oil started dominating India’s crude oil basket — after Moscow declared war on Ukraine — Gulf countries led by Iraq, Saudi Arabia and UAE accounted for a major portion of India’s crude shipments. These were typically higher sulphur, medium density crudes bought under term contracts, the price of which was linked to the Oman/Dubai benchmark.
 

But the advent of Russian oil, India’s biggest crude source, accounting for over 40 per cent of its imports, changed the pricing. Urals and other lighter crudes are typically linked to Brent oil and purchased on spot basis. So, the Brent benchmark is important for India. Also, some of India’s term LNG contracts and some spot volumes are linked to Brent. US sweet crude purchases, which accounted for 4 per cent of India's crude purchases last month, is linked to WTI.