Comments
Uncertainty over the nature and extent of retaliatory strikes by Israel on Iran is not just keeping the Middle East and global oil markets on tenterhooks, but also reducing the headroom available with Indian oil marketing companies (OMCs) to cut petrol and diesel prices.
Between September 11 and October 5, Brent prices rose from below $70 a barrel to more than $78, a development that skews the dynamics of firming up decisions to reduce retail prices of the key auto fuels.
Analysts and trade sources point out that geopolitical risk dominated oil markets in the first week of October 2024 with WTI and Brent up roughly 8 per cent since beginning of the week when Iran fired missiles at Israel, which coupled with an expected retaliatory action has upped the risk premium.
Growing chorus on price cut
The voices in favour of reduction is retail prices of auto fuels grew stronger since September 11, when Brent crude futures dropped below $70 a barrel, the lowest since late 2021 and down $20 a barrel from April’s 2024 high. In early August, prices were at $82.
On September 12, Oil Secretary Pankaj Jain said “In last 7-10 days, crude oil prices have come down. Currently, Ministry is analysing the prices and how long they will stay low. It would not be appropriate to cut prices by following developments in just a week. We need time to analyse this trend for a longer duration.”
On September 26, ratings agency ICRA in a report said that OMCs’ net realisation was higher by around Rs 15 a litre for petrol and about Rs 12 for diesel against international product prices in September 2024 (till September 17). Retail selling price (RSPs) of these fuels have been unchanged since March 2024 and there appears to be headroom for their downward revision by Rs 2-3 per litre, if crude prices remain stable.
A senior government official indicated that crude oil prices are still below OMCs comfort level of $80 a barrel. “How long they sustain will be critical. Refiners export earnings and other dynamics also need to be factored,” he added.
However a top official with a domestic refiner said “Reducing retail prices at this point can happen due to political exigencies. Business wise, volatility has increased in oil markets. It is difficult to say what will happen there (Middle East), but the sense we are getting is that trade will largely remain out of the conflict’s purview like in the last one year. But, as I said earlier, there is no guarantee.”
The official, however added that in the next 2-3 months as OPEC+ reverses production cuts (December 2024) and clarity emerges on China and global oil demand, a far better window of opportunity (than at present) will be available on reducing retail prices of petrol and diesel.
Market dynamics
The International Energy Agency (IEA) in its September oil market report pointed out that global oil demand growth continues to decelerate, with reported H1 2024 gains of 800,000 barrels per day (b/d) Y-o-Y—the lowest since 2020. Outside of China, oil demand growth is tepid at best.
“Chief driver of this downturn is a rapidly slowing China, where consumption contracted Y-o-Y for a fourth straight month in July, by 280,000 b/d,” it added.
Trade sources said that weak Chinese demand and economic headwinds have heightened oversupply fears putting pressure on prices. OPEC+ will aim to keep prices in the $80 per barrel range, which is the fiscal break-even price for Saudi Arabia, the world’s top crude oil exporter.
In an apparent effort to halt the precipitous slide in oil prices, the IEA said that Saudi Arabia and its OPEC+ allies in early September announced that they would postpone by two months the planned unwinding of extra voluntary production cuts.
“But with non-OPEC+ supply rising faster than overall demand – barring a prolonged stand-off in Libya – OPEC+ may be staring at a substantial surplus, even if its extra curbs were to remain in place,” it added.
Last week, the Libyan government said that it would reopen all oil fields and export terminals, returning around 700,000 barrels per day (b/d) of crude to the market.
Comments
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.