Insights provided by Saudi Arabia’s decision to cut selling prices of crude meant for Asia for October offer comforting thoughts for the Modi government as it prepares for a crucial round of assembly elections, including the all-important Uttar Pradesh.
Immediately after the price leader Saudi Aramco effected the price cut, giving a clear hint to what it considers to the market direction in relation to the demand-supply situation, oil price took a hit, bringing the levels down considerably.
The run-up to every election has been marked by a move by the government to enter into an understanding with the oil companies to hold the prices so as to limit voter discontent over spiralling fuel prices. The marketing companies have invariably obliged, with the firm understanding that once the elections are over, they would be able to ‘recoup’ their losses, though notional, by revising the prices upwards.
It appears that the prevailing market conditions lend a helping hand as various factors, including the risk of demand disruption due to a possible third wave of Covid pandemic, begin to play out. The Saudi price cut led to traders resorting to profit booking as they got clear clues about the Saudi perception. Observers see in the Saudi price cut a move to defend the kingdom’s share of the Asia crude markets in view of the risk of a possible demand drop. At the same time, the Saudi cut is not large enough to warrant huge concerns about neither market share aspirations nor demand. But clearly, it is a tilt in the negative direction for the market, after a long period of bullish news from around the oil world.
Last week’s price developments were to some extent offset by some positive news flow on Covid, particularly, stronger-than-expected Chinese trade data, both of which are interpreted as bullish for economic momentum and oil consumption ahead.
Several countries in Asia Pacific are easing certain Covid-19 restrictions, such as Hong Kong, Thailand and New Zealand, while the South African variant slowed in August according to scientists, all supporting oil demand expectations this morning.
Overall, Europe has emerged as a ‘centre of strength’ for road fuels demand as the economies opened up over summer, where travellers have naturally taken more to the roads than the air during the travel season. Nevertheless, European road fuels demand dropped by around 5 percent in August, that had a slow start, from the recent peak in July according to real-time traffic data. Latest reports suggest that European traffic has been picking up by two percent over the past two weeks.
According to market analysts, robust gasoline demand and fairly low inventories in both sides of the Atlantic Ocean also lend support to light-sweet crude benchmarks such as Brent.
Chinese trade data, showing an increase of crude imports to a five-month high of 10.5 million bpd as independent refiners were allowed to step up buying amid new import quotas, added to optimism, though the important question for the market is whether this trend in China’s crude imports will continue upwards in the ensuing months. That is a complicated matter which the market is trying to get right, as it also depends on government policies on quotas and use of strategic reserves.
Petrol and diesel prices in India have been steady for nearly three weeks, although the prevailing rates are at record high levels. There have been persistent demands for petroleum products to be brought under GST, which would reduce the prices on account of lower taxes, but the government has been resisting it as fuel tax contributes to a large share to the government’s tax kitty.
In fact, in spite of lower sales due to Covid, the Centre’s tax collection from petrol and diesel in 2020-21 went up by as much as 88 percent, netting more than Rs 3 lakh crore, which is a record. This has been achieved through a sharp increase in excise duty, taking advantage of low crude prices. But as the prices inched up, the increases were passed on to the consumers, in the process protecting the high taxes. (IPA Service)