State fuel retailers are suffering losses ₹5 per liter of gasoline and ₹Diesel prices jumped 23 liters as fresh fighting in West Asia sent international oil prices above $100 a barrel, the highest since July last year, analysts said on Wednesday.
Brent crude, the international benchmark for oil prices, rose 2.5 percent to over $100 a barrel, while U.S. West Texas Intermediate crude rose nearly 2 percent to about $95. This comes after rising tensions in the Middle East amid the latest skirmish between the US and Iran.
The last time the Brent price touched $100 was on July 23.
India, the world’s third largest oil importing and consuming country, is particularly exposed to fluctuations in global crude oil prices. The country imports more than 88 percent of its oil, the raw material for producing fuels such as gasoline and diesel.
A sustained rise in prices will increase the country’s dollar import bill and could put pressure on the trade balance and the rupee, analysts said.
Additionally, since retail pump rates remain unchanged, this results in fuel retailers incurring losses on the sale of petrol, diesel and cooking LPG.
Prashant Vasisht, senior vice-president and group head of corporate ratings at ICRA Ltd, said with the escalating hostilities between Iran and the US, Brent prices crossed the US$100 per barrel mark on Wednesday, while the Indian crude basket is trading at around US$109 per barrel.
“At the average price from September to today, the marketing profit on gasoline is negative. ₹5 per liter and diesel at minus ₹23 liters, and domestic liquefied petroleum gas recovery volumes are at ₹200 per cylinder,” he said.
“If the current geopolitical situation continues, crude oil prices could rise further given that some countries, including China, have used their strategic reserves for a significant portion of their consumption, and its return to the market could increase demand during a period of limited supplies.”
Higher oil prices could also contribute to domestic inflation through fuel, transportation and other energy costs. But the impact on consumers and the broader economy will depend in part on how much of the increase comes from domestic fuel prices and how long international prices remain elevated.
At the moment, retail prices for gasoline and diesel fuel have remained frozen for more than three months. The tariffs were last revised on May 25, when they were increased. ₹2.61 liters for gasoline and ₹2.71 per liter of diesel fuel.
The hikes were part of a rate review that occurred in the second half of May in response to rising international prices due to the war in West Asia disrupting energy flows from the Gulf countries. In general, the price of gasoline has increased ₹7.35 liters and diesel each ₹7.53 in four parts.
India’s crude oil import bill rose over 56 percent in April-July to US$63.4 billion from US$40.5 billion in the same period last year, according to the Petroleum Planning and Analysis Division (PPAC) of the Ministry of Petroleum.
Purchase volumes remained virtually the same – 81.9 million tons in the first five months of the current financial year and 81.5 million tons last year.
India’s crude oil import basket averaged $108.91 per barrel as of September 8, according to PPAC.
The basket consists of sweet or low sulfur varieties (Brent) and sour varieties containing more than 0.5% sulfur (average for Oman and Dubai) in a ratio of 77.81:22.19.
The Indian crude oil basket crossed the US$100 mark earlier this month and the September average stands at US$102.11 per barrel, up from US$90.19 in August and US$82.04 in July.
Rajeev Sharan, head of research at Brickwork Ratings, said the price of Brent crude was back above $100 a barrel, its highest since late July, driven mainly by tensions between the United States and Iran and concerns about oil supply in the Strait of Hormuz rather than by rising demand.
“With OPEC maintaining stable production and geopolitical risk remains high, prices are likely to remain firm and volatile over the coming month, only easing if tensions ease,” he said, adding that higher-priced oil would reduce profits in oil-sensitive sectors such as aviation, paints, tires, chemicals, logistics and some FMCG sectors.
“Rising oil prices also raise inflation risk and strengthen the case that the US Federal Reserve may take a hawkish stance or even raise interest rates on September 16,” he said.
For India, rising oil prices mean more expensive imports, a wider trade gap and a weaker rupee, leaving the RBI little room for cuts at the October 7 review, he said.
“We expect the RBI to maintain the repo rate at 5.25% and remain vigilant. The possibility of a rate tightening cannot be ruled out if Brent remains above US$100 and contributes to wider inflation,” he added.