NEW DELHI: India’s crude oil basket has soared nearly 30% in less than two weeks to $128.7 a barrel on September 14 from $99.35 on September 2, a development that could sharply raise the country’s import bill, widen the current account deficit and lead to a resurfacing of the fiscal worries that had abated for a few weeks since mid-June. Costlier crude imports could also stoke inflation at a time when it has started to rise again on account of higher food prices and the pass-through effect of fuel price increases.
Further, fuel marketing margins of state-run oil companies may be pushed deeper into the red again.
“India can absorb crude above $110 a barrel, but at a rising economic cost. Every $10 increase in crude could widen the current account deficit by 0.35-0.5 percentage point of GDP, add 20-25 basis points to inflation and shave 15-20 basis points off GDP growth,” an analyst tracking the sector said.
The macroeconomic risks turn sharper if crude remains close to $130. Chief Economic Adviser V Anantha Nageswaran told the Standing Committee on Finance on March 2 that crude at $130 a barrel for two-three quarters could pull FY27 growth down to 6.4%, push inflation to 5.5% and widen the current account deficit to around 3.2% of GDP.
The fiscal impact could be felt more in the form of a spike in fertiliser subsidies. As against the budget estimate of Rs 1.77 lakh crore, the subsidy on soil nutrients was seen to rise to around Rs 3 lakh crore given the elevated prices of crude oil and its derivatives, LNG and imported fertilisers that prevailed in March-April. The estimates have since been revised to Rs 2.2-2.3 lakh crore, but the latest volatility in crude prices could necessitate another upward revision of the estimate.
The basket had climbed to $115.98 a barrel on September 9 before rising another 11% in five days. Its September average now stands at $109.76 a barrel, nearly 22% higher than $90.19 in August. The basket averaged $82.04 in July, $83.22 in June, $106.23 in May and $114.48 in April.
“If crude remains at $110-115 a barrel for six months, the import bill could increase by $56-64 billion, growth could slip below 6% and inflation could remain above 5%,” the analyst said. India has around 74 days of total fuel reserves, limiting the immediate risk of physical shortages and making the impact largely financial, the analyst added.
The macroeconomic risks turn sharper if crude remains close to $130. Chief Economic Adviser V Anantha Nageswaran told the Standing Committee on Finance on March 2 that crude at $130 a barrel for two-three quarters could pull FY27 growth down to 6.4%, push inflation to 5.5% and widen the current account deficit to around 3.2% of GDP.
Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA, said the Indian crude basket was around $128-129 a barrel on September 14, with prices rising due to the twin impact of renewed hostilities around the Strait of Hormuz and the closure of the Saudi East-West pipeline, which carried around 4-5% of global liquids demand.
The crude spike has already hit oil marketing companies. Vasisht said marketing margins adjusted for Special Additional Excise Duty (SAED) are currently negative ₹7.7 a litre on petrol and ₹2.6 a litre on diesel. Without the SAED adjustment, margins are negative ₹9.2 a litre on petrol and ₹27.6 a litre on diesel.
“If pump prices are not revised and this scenario continues, under-recoveries on domestic LPG and auto fuels could be substantial,” Vasisht said. Total under-recoveries for OMCs were already around ₹61,900 crore at the end of the June quarter, he added.
Global crude prices remained firm on Tuesday as attacks on Saudi Arabian energy infrastructure kept the kingdom’s East-West Pipeline offline, raising concerns that damage to energy assets and transport routes could take longer to repair.
Brent crude futures were 21 cents, or 0.2%, higher at $105.89 a barrel by 1148 GMT, after touching a session high of $108.43. US West Texas Intermediate futures were up 90 cents, or 0.89%, at $102.29 a barrel, after rising as high as $104.21 earlier in the session.
Supply concerns intensified after Iran-backed Houthi forces in Yemen launched fresh attacks on Saudi Arabia on Monday, while Gulf Arab states postponed planned discussions with Iran.
The disruption is being compounded by higher shipping costs. In the week to September 6, the key Aframax tanker rate for moving crude from Russia’s Black Sea port of Novorossiysk to West India rose for a seventh consecutive week, increasing 2.7% from the previous week. Freight to India has climbed to $23.20 a barrel, while the corresponding cost to North China is $25.70 a barrel.
Sumit Ritolia, lead analyst for refining supply and modelling at Kpler, said: “The closure of the Saudi East-West Pipeline further reduces routing flexibility for Indian refiners at a time when several key oil transit routes are already under pressure.”
“India will likely lean even more on diversification across Russia, the US, West Africa, Latin America and other non-Middle East sources to reduce exposure to any single corridor. Russian crude remains particularly important. With multiple chokepoints facing disruption, Russian barrels routed through the Black Sea and Baltic become more valuable from a supply-security perspective,” he said.
“The bigger risk for India is not only physical availability of crude, but the rising landed cost. Higher crude prices, freight, insurance and longer voyages all increase the delivered cost of barrels. For India, that means a higher oil import bill, more pressure on the current account and rupee, and a greater inflationary risk if elevated energy costs persist,” Ritolia said.
He added that OMC margins and the government’s fiscal position could also come under pressure if domestic fuel prices do not fully reflect the increase in international crude and freight costs.
Source: The Financial Express
