Time to cut retail prices as crude market shows softening trends

Story by  Sushma Ramachandran | Posted by  Aasha Khosa | Date 19-06-2023
Representational image
Representational image



Sushma Ramachandran

World oil markets continue to show softening trends, a development that is causing much cheer in emerging economies like India. Countries that need to import most of their fuel needs have been under severe stress since last year when geopolitical events pushed crude oil prices towards stratospheric levels. The current dip to more affordable levels is continuing despite strenuous efforts being made by the powerful oil cartel OPEC plus to maintain what it describes as price stability.

The latest salvo to achieve this aim is Saudi Arabia’s unilateral decision last week to cut its output by one million barrels per day from the existing 10 million bpd (Barrel per dollar). So far the move has not created any ripples in the market as prices continue to hover in the range of 70 to 75 dollars per barrel for U.S. crude and the benchmark Brent crude.

The slide in prices had begun in January this year when recession fears swept the globe after the U.S. Federal Reserve made it clear that interest rates would continue to rise till inflation reached the target of two percent.  A short-lived banking crisis following the collapse of the California- based Silicon Valley Bank added to concerns over a depressed economic outlook. The situation reversed briefly in April when OPEC plus announced sizable output cuts seeking to shrink availability and push up prices. It succeeded temporarily as crude prices spiked to 87 dollars per barrel. But markets soon returned to their earlier softening streak.

Currently, demand remains a worry for oil producers as China’s economic recovery is reported to be uneven with weak domestic demand in the first quarter of 2023. In addition, Russian oil is flowing in large volumes into global markets though ostensibly it is part of the cartel and is bound to carry out committed production cuts of 500,000 bpd. It may be recalled that Russia and nine other oil-producing countries including Mexico and Kazakhstan tied up with OPEC in 2016 to make the cartel more effective in world markets. Known as OPEC Plus, it now has the added heft of one of the world’s top oil producers, Russia.

The muted tone in oil markets is also being attributed to increased availability, as U.S. inventories are rising which could lead to demand continuing to moderate for the rest of the year.

The bearish outlook on oil comes as a relief to India which relies on over 80 percent of its fuel consumption on imports. Forecasts earlier made for 2023 had envisaged international prices going up to 100 dollars per barrel by the end of the year which would have put pressure on the exchequer. Even now Goldman Sachs persists in predicting that a drawdown of inventories due to output cuts imposed by OPEC plus, will lead to prices firming up to over 90 dollars per barrel by the end of the year. As of now, this scenario does not look likely but much will depend on geopolitical developments in the coming months.

Thus, for the time being, India has a reprieve from the bugbear of high oil prices. The basket of crudes imported by Indian refineries has already fallen by nearly 40 percent from 116 dollars per barrel a year ago to about 71 dollars per barrel right now. The oil import bill for 2023-24 is consequently also expected to be lower than last year’s 211 billion dollars.

The next step for policymakers should now be to cut domestic retail prices of petroleum products, to match the decline in international prices. To put the issue in perspective, it must be conceded that oil marketing companies were restrained from hiking rates last year when world prices had shot up. Excise duty was also cut last May to give a reprieve to consumers. The restraint was costly for the OMCs which had been saddled at one point last year with under-recoveries of about Rs one lakh crores.

In this context, it must be clarified that though technically the system of administered oil prices has been done away with, effectively it continues as the public sector companies are still subject to government directives on prices of some products like petrol and diesel. While the goal has always been to have a system of market-linked rates, the fact is that it is beneficial to consumers for directives that may be for the public good. For instance, allowing OMCs to hike prices last year would have reinforced inflationary pressures on the economy and put a heavy burden on consumers.

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The scenario has now altered significantly as the OMCs have been able to recoup their losses to a large extent. They are even reported to be making profits in recent months. The consumers who have been facing higher transport costs due to high petrol and diesel prices, now need to be given some relief. Even though excise had been cut in May last year, there had been several hikes in prices during March and April. Since then the oil companies had maintained the status quo, but even so, oil product prices have been at higher levels than ever in the past. It is thus time to take bold steps and bring relief to consumers right now. This is the ideal time to do so as the outlook is benign with world oil markets looking set to continue softening trends for the rest of the year.