India’s retail inflation hitting a 14-month high in July has coincided with global crude oil prices trading at $85.22, making it difficult for the government to resume the daily revision of petrol and diesel retail prices on hold since April 2022.

Retail inflation hit 7.4 per cent in July, with expectations that August numbers could be 6.5-7.2 per cent. While vegetable prices are expected to cool down as rains recede, there are concerns that the prices of cereals, pulses, milk and spices could spoil the kitchen budget of the common man, particularly with the festival season shopping just a month-and-a-half away.

Besides, as Saudi Arabia and Russia continue with voluntary production cuts, which are expected to last till 2023-end, crude oil prices have already breached the $85 per barrel range, the highest since April 2023. Declining Russian discounts on Urals have adversely impacted the marketing margins of oil marketing companies (OMCs).

Price revision

OMC officials and analysts pointed out that raising retail prices of petrol and diesel is “out of the question at present” as it will have a cascading impact on food prices. It is expected that the government will not go for raising retail prices of the two auto fuels.

On the other hand, reducing retail prices has its own pitfalls, a senior OMC official explained. He said discounts by Russia have come down significantly, which going ahead will pinch the margins of PSU OMCs.

S&P Global Commodity Insights’ energy security sentinel pointed out that the Russia-Ukraine conflict-hit prices of Russia’s key crude grade Urals, which at times since the conflict began (February 24, 2022) was trading at a discount of over $40 per barrel to Dated Brent. By August 8, 2023, the discount had fallen to $12.80, following declines in Russian crude production.

Ural prices crossing $60 per barrel (G7 price cap) further complicates the situation, said the official, adding that discounts are now in the range of $8 a barrel for cargoes for September and October loading. A change of $1 per barrel in benchmark petrol or diesel price makes an impact of around 48 paise per litre on margins.

Marketing margins are likely to be hit if international crude oil prices continue to strengthen, coupled with lesser discounts from Russia. This will also affect the profit from exporting refined products, particularly diesel, to Europe.

According to ICICI Securities, a combination of volatile geopolitical worries, steady demand, and refinery supply woes kept gross refinery margins (GRMs) elevated in FY23, with benchmark Singapore (SG) GRMs at $10.8 per barrel in FY23, up $2.2 year-on-year.

However, global recession worries and lack of demand momentum in China in Q1 FY24 have led to a sharp pull-back in GRMs, with SG GRMs declining by $4.1 a barrel quarter-on-quarter for the quarter, it added.

Cheap Russian crude oil helped PSU OMCs to pare their losses that have been mounting since April 2022. After a tumultuous Q4 FY22, PSU OMCs pared their losses and posted profits in Q4 FY23 and Q1 FY24. However, If prices are reduced, it can impact OMC margins in Q3 and Q4 FY24, an analyst said.

Another analyst said that the Centre can reduce excise duty, on the lines of the cuts in November 2021 and May 2022, by ₹13 per litre and ₹16 on petrol and diesel, respectively, which cooled retail prices. A similar exercise can be undertaken.

However, this will impact the Centre’s share of income from taxes on oil and gas. For instance, during FY23, the petroleum sector’s contribution to the Centre’s kitty fell to ₹4.28-lakh crore from ₹4.91-lakh crore in FY22.

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