Oil retreats, still above $100; no supply shocks for India

Published - February 25, 2022 06:48 pm IST - New Delhi

International oil prices retreated from an over seven-year high but was still above $100 a barrel and continue to pose threat to India's inflation rate and current account deficit.

While there are no supply concerns as the oil route remained open, consumers will feel the pinch when PSU oil firms start passing on the increase in international rates through a revision in petrol and diesel prices, which have been on a pause for over three-and-a-half-months in view of elections in Uttar Pradesh and four other States.

The government is "closely monitoring the situation" and will "take appropriate steps as and when required", a top official said.

Brent crude oil surged past $105 per barrel on Thursday for the first time since August 2014, following Russia's invasion of Ukraine. It however retreated and fell to $101 on Friday. It was trading at $101.93 a barrel at 1330 hrs.

The spike was a result of fears in the market of Russian supplies to Europe and rest of the world being impacted, a trader said adding the risk premium on the oil price right now is around $10-15.

Industry sources said the gap between the retail selling price of petrol and diesel and the cost is well over ₹10 per litre, which when passed on after completion of the elections next month would result in a spike in the inflation rate that is already above the RBI's tolerance level of 6%.

Besides, high oil prices risk impacting the current account deficit as India imports 85% of its oil needs and will have to pay extra because of higher prices.

Morgan Stanley said higher oil prices are negative for India, which is the world's third-largest oil importer.

Great Eastern Energy Corp. Ltd. (GEECL) chief executive Prashant Modi said the availability of hydrocarbons is expected to become a major issue worldwide.

"This is particularly concerning for a nation like India, which is heavily dependent on imports for its hydrocarbon requirements," he said. "This crisis is again a reminder that we need to urgently build a conducive policy environment in India to boost domestic production of oil and gas." Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, said, "As the global economy witnesses a drop in headwinds from the COVID pandemic, new geopolitical risks emerge from the Russia-Ukraine conflict and if turns out to be a prolonged affair, crude oil prices are likely to stay above $100 over the near term."

This will clearly have an impact on the domestic inflationary scenario where there are already significant undercurrents due to increasing pass-through of higher commodity prices with improving demand in manufactured products and even services, he said.

"While the government can partly alleviate the pressures through a further cut in excise duties of retail fuels, input costs are set to increase further for sectors such as paints, chemicals, plastic products, transport and aviation in the near term." India, the world's third-largest oil consumer, depends on imports to meet 85 per cent of its needs. The imported oil is converted into products like petrol, diesel and LPG.

Saudi Arabia, Iraq and other Middle East nations account for 63.1% of all imports. Africa is the second biggest supplier, accounting for close to 14% of all supplies while North America gives 13.2%. 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 tonne of LNG a year from Gazprom of Russia.

In retaliation to the Russian attack, the United States, the European Union, Britain, Australia, Canada and Japan have announced sanctions targeting Russian banks and wealthy individuals while Germany halted a major gas pipeline project from Russia.

Energy and other trade as of now are out of the sanction ambit.

"Availability is not a concern. We are getting normal supplies and none of the suppliers has sought any deferment," an official with Indian Oil Corp (IOC) - the nation's largest oil firm, said.

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