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Homechevron_rightBusinesschevron_rightPetrol, diesel prices...

Petrol, diesel prices hike likely as election season ends next week

Petrol, diesel prices hike likely as election season ends next week

Mumbai: The Russian invasion of Ukraine has caused the shortage of certain commodities, because of which prices of many commodities have risen, particularly the crude oil.

In India, the fuel prices which are at its high due to heavy tax on it to compensate the pandemic effect are expected to be raised after the election season in states is over.

As the international crude prices hovers at $100 a barrel, there is expected a petrol and diesel prices hike to bridge the Rs 9 a litre gap caused by the global price hike.

International crude oil prices shot above $110 a barrel for the first time since mid-2014 on fears that oil and gas supplies from energy giant Russia could be disrupted, either by the conflict in Ukraine or retaliatory western sanctions.

The basket of crude oil India buys rose above $102 per barrel on March 1, the highest since August 2014, according to information from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry. This compares to an average of $81.5 per barrel price of the Indian basket of crude oil at the time of freezing of petrol and diesel prices in early November last year.

"With state elections getting over next week, we expect daily fuel price hikes to restart across both petrol and diesel," JP Morgan said in a report. The seventh and final phase of polling for the Uttar Pradesh legislative assembly is on February 7 and the counting of votes slated for March 10.

State-owned fuel retailers Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are making a loss of Rs 5.7 a litre on petrol and diesel. This is without taking into account their normal margin of Rs 2.5 per litre.

The brokerage said for oil marketing companies to revert to normalised marketing margins, retail prices need to increase by Rs 9 a litre or 10%. "We expect a combination of small excise duty cuts (Rs 1-3 per litre) and retail price hikes (Rs 5-8 a litre) to reflect the pass-through of USD 100 per barrel oil," it said.

Russia makes up for a third of Europe's natural gas and about 10% of global oil production. About a third of Russian gas supplies to Europe usually travel through pipelines crossing Ukraine.

But for India, Russian supplies account for a very small percentage. While India imported 43,400 barrels per day of oil from Russia in 2021 (about 1%of overall its imports), coal imports from Russia at 1.8 million tonnes in 2021 made up for 1.3% of all coal imports. India also buys 2.5 million tonnes of LNG a year from Gazprom of Russia.

While supplies at the moment seem to be of little worry for India, it is the prices that are a cause of concern.

Domestic fuel prices—which are directly linked to international oil prices, as India imports 85% of its oil needs—have not been revised for a record 118 days in a row.

Rates are supposed to be revised on a daily basis but state-owned fuel retailers IOC, BPCL and HPCL froze rates as sooner did electioneering to elect a new government in Uttar Pradesh, Punjab and three other states started.

Petrol costs Rs 95.41 a litre in Delhi, and diesel is priced at Rs 86.67. This price is after accounting for the excise duty cut and a reduction in the VAT rate by the state government.

Before these tax reductions, petrol price had touched an all-time high of Rs 110.04 a litre and diesel came for Rs 98.42. These rates corresponded to Brent soaring to a peak of $86.40 per barrel on October 26, 2021. Brent was $82.74 on November 5, 2021, before it started to fall and touched $68.87 a barrel in December.

Though JP Morgan sees oil coming down to $86 a barrel by the October-December quarter, it can hit $150 in a scenario of Russian Energy exports coming to a halt.

"To summarise, in the event of completely shutting Russian oil supply (that is partially offset by a resumption of Iran exports and the use of strategic oil reserves), crude oil was forecasted to rise to USD 150 per barrel.

"However, in the event sanctions spared energy transactions but were intensified in other areas, our baseline view was that crude prices would rise to average USD 110 in 2Q22 (April-June) with prices spiking to USD 120 a barrel in the interim as markets priced retaliatory measures by Russia, such as curtailing oil supply," it said.

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