The global oil prices on decline again. Nonetheless, for the Indian economy to be benefitted, it needs a sustained decline, or at least smoothing out any volatility. Brent crude prices declined below $70/barrel. On 10th Sept’24, the price remains at $69.08% the lowest since Dec’21. Nearly, 42% of oil production, amounting to over 730,000 barrels per day, remained shut in due to the storm. Despite these supply disorders, oil prices faced downward pressure amid ongoing concerns about sluggish demand in key markets. Global oil demand remains subdued in the first half of 2024, whereas the slowdown in China remains one of the major reasons. The official Purchasing Manager’s Index (PMI) data of China in August’24 remains at six month low at 49.1. The major reason of the oil price softening is that whereas supply side factors remain steady due to several factors, like growing North American shale oil production, as well as OPEC plus countries’ decision of higher production. An expected political stability in Libya might stabilise the production further. Though Russia continues to be the biggest source of imports of crude oil for India for last couple of months, this remains somewhat softened during Aug’24 due to refinery maintenance season. However, amid festive seasons during Nov’24 the demand is likely to increase. According to media news, the sequential decline of oil imports from Russia during Aug’24 remains at (-)14.5%. Despite this, Russia accounts almost 40% of India’s total oil imports.The Russian oil usually remains the major source of imports for the India’s crude oil basket.
According to media news, Gulf countries led by Iraq, Saudi Arabia, and United Arab Emirates (UAE) accounted for a major portion of India’s crude shipments. The advent of Russian oil, accounting of over 40 per cent of India’s imports changed the pricing as ural and other lighter crudes are typically linked to Brent oil and bought on spot basis. The oil import from the second largest sources of Indian oil, namely Iraq, has increased 6.7% sequentially to 0.85 mn bpd during Aug’24, whereas there is a more than 16% decline from the third-largest source of oil, Saudi Arabia at 0.55 mn bpd during the same month. Where both Iraq and Russia’s market share has increased, Saudi Arabia’s market share has contracted marginally. Will it help in reducing Domestic Oil Prices?: The question that whether the softening of international crude oil prices could translate into lower domestic prices, largely depends on the oil marketing companies (OMCs). According to the press release (10 March 2024) by the Ministry of Petroleum & Natural Gas (MoP&NG), the combined profit of OMCs for FY 2023-24 stood at Rs 86,000 crore, over 25 times higher than the extraordinarily difficult previous fiscal year. For the full 2023-24 fiscal, HPCL reported a record net profit of Rs 16,014 crore as opposed to a loss of Rs 6,980 crore in the previous year. Nonetheless, all three major OMCs registered a weak first-quarter in FY25 due to lower refining margins. Whether there would be a reduction in retail prices is also important, that might have some impact on their margins. An alteration of pump prices could be subject to a political decision, in the face of impending polls in Maharashtra and Haryana. At the ongoing prices, OMCs are likely to make ₹ 12-15 /litre as gross marketing margins on petrol or diesel. Gross Refining Margins (GRMs) has also subdued due to fall in crude oil prices and product spread. There might be certain coordination between the finance ministry and petroleum ministry regarding a revision of the windfall tax on the sale of locally produced crude oil and export of petroleum products.
India has raised its windfall tax on petroleum crude to $83.75 per metric ton effective 16th July’24 for a two-week period. However, the translation of lower global oil price on possible lower domestic price would crucially depend on if windfall tax could be softened and /or according to the trends of Gross Refining Margins (GRMs). The margin was a bit constrained due to less Russian discounts among other factors.The current petrol prices are ₹ 94.72 per litre, domestically it might be influenced subject to excise duty, dealer’s commission, state value added tax (VAT) etc. The excise duty component is substantial. The current diesel prices are at ₹ 87.62 per litre. Whereas the excise duty in case of petrol is ₹19.90/ litre, the excise duty for diesel is much less at₹ 15.80/litre. According to media reports, private players share in petrol retail has increased to 9% in 2024 from 8% in 2023, whereas in diesel, it has increased from 7.7% to 9.6%. If private refiners sell to state-run oil companies they get the refining margins, which have been declined in recent months. On the other hand, if they sell through their own retail network, they will obtain additional marketing margin which has increased as domestic pump prices have not decline in line with global petrol and diesel prices. The OMCs have also got an opportunity to reload their volumes with flexibility to re-order their inventory. According to media reports and official sources, while largely crude oil from West Asia is generally purchased on term contracts, spot purchase allows refineries to secure different grades of oil. Hence, OMCs have placed spot orders with conventional West Asia suppliers such as Iraq, UAE etc.