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What OPEC’s decision to increase crude production means for India

Thursday, 08 April 2021 | 16:00

As the number of covid-19 cases continue to rise and lockdowns prevail in many countries across the world, the OPEC+ group on Monday decided to ease production cuts for May, June and July.

In its previous meeting, the cartel of oil producing nations had decided to continue with March production levels of 7.05 mbpd (million barrels per day) in April as well. Russia and Kazakhstan were allowed to increase production by 130 and 20 thousand barrels per day respectively.

Saudi Arabia was to continue to extend the additional voluntary adjustments of 1 mbpd for April as well. The cartel will be pumping an additional 0.35 mbpd in May (compared with the 6.9 mbpd cuts undertaken in April), an additional 0.35 mbpd in June and increasing it by 0.441 mbpd in July.

What does it mean for crude oil price?

Care Ratings expects the price of crude oil to be in $64-67 per bbl range, creating a new base for oil prices. From the previous meeting held on 4 March till 31 March, Brent crude oil price and WTI (West Texas Intermediate) have fallen by 4.8% and 7.3% respectively. Crude oil prices had initially increased following the decision by the OPEC+ to keep crude oil output unchanged in April coupled with continuation of a voluntary production cut by Saudi Arabia for another month. Improved fuel demand conditions amid ongoing stimulus measures and progress of the vaccination drive had also pushed the prices higher.

Oil prices had also risen because of the attack on Saudi Arabia’s oil facilities by the Houthi rebels in Yemen but had settled soon after. Prices fell on account of demand concerns due to a slow vaccination campaign in Europe and increase in US crude oil inventory. However, with a container ship blocking the Suez Canal in the third week of March, crude oil prices rallied again, only to fall once the ship was freed and movement in carrier traffic resumed. The month ended with the price of crude oil falling by 1% and 2.3% due to the rising coronavirus cases and reinforcement of lockdowns in some countries, which acts as a major impediment in the oil demand outlook.

What will be the impact on the Indian economy?

India imports up to 85% of its oil requirements. On a macro level, increase in oil price with imports of million barrels of crude oil during FY21, a dollar increase in prices on a permanent basis would increase the bill by roughly $1.4 billion per annum. India’s crude oil import bill had come down by 8.7% during FY20 to $102.2 billion and current value of crude oil imported too has fallen by 43.7% during FY21 to $53.8 billion.

Crude oil and its products have a weight of 10.36% in the WPI. Of this, crude oil and natural gas have a weight of 2.41% and mineral oils around 7.95%. Therefore, any increase in the price of crude oil would tend to impact the WPI (wholesale price index) inflation number commensurately. In case of the CPI (consumer price index) the impact of crude oil prices is directly related to the pass through to transportation fuels which has a weight of 2.39%. Thus, an increase in the crude oil prices will impact the WPI more than the CPI.

What will it mean for domestic fuel prices?

Domestic price of petrol and diesel is high at the moment and not reflective of the global crude oil prices. Going forward a significant amount of volatility is expected in the price of crude oil and keeping that in mind, unless the government does not cut taxes levied on petrol and diesel, prices of the auto fuel are expected to remain stable at the current level. As per the latest available data on price build of petrol and diesel, the government collects around 163% taxes, (excise duty and VAT) on the base price of petrol and 126% in the case of diesel (as on April 1 2021). Taxes now make up around 59% of the retail price of petrol, 54% of the retail price of diesel (as on 1 April 2021).

Price of petrol currently is retailing at ₹90.6 per ltr in Delhi, ₹97 in Mumbai, ₹92.6 in Chennai and ₹90.8 per ltr in Kolkata respectively. Diesel was retailing at ₹80.9/ltr in Delhi, ₹88 per ltr in Mumbai, ₹85.9 per ltr in Chennai and ₹83.8 per ltr in Kolkata. Retail prices of petrol and diesel in India are linked to their prices in the global markets. Prices of petrol and diesel in India are worked out based on the average of the trailing 15 days of benchmarked Oman and Dubai crude prices, which move in tandem with global crude oil prices. The pricing formula involves 80% of import price and 20% export price of the fuel. Which means prices of petrol and diesel are correlated to that of crude oil.
Source: Live Mint

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