Rising oil prices may hit Budget math

India currently imports more than 85% of its crude oil requirements

January 08, 2020 10:10 pm | Updated 10:24 pm IST - MUMBAI

BENGALURU, KARNATAKA: 09/09/2018: Vehicle owners drive into a fuel pump, for fill up petrol and diesel at Shivananda circle, Anticipating a Bharat Bandh tomorrow, in Bengaluru on September 09, 2018. All India Congress Party and other political parties called for a Bharat Bandh, in Bengaluru on September 10, 2018, against the price hike in fuel. 
Photo: K. Murali Kumar

BENGALURU, KARNATAKA: 09/09/2018: Vehicle owners drive into a fuel pump, for fill up petrol and diesel at Shivananda circle, Anticipating a Bharat Bandh tomorrow, in Bengaluru on September 09, 2018. All India Congress Party and other political parties called for a Bharat Bandh, in Bengaluru on September 10, 2018, against the price hike in fuel. Photo: K. Murali Kumar

The price of crude oil constituting the Indian basket has been increasing since October and is likely to exceed $70 a barrel this month on escalating U.S.-Iran tensions.

Rising oil prices had already led to an increase in the prices of petrol and diesel by about 54 paise a litre and 83 paise a litre respectively since January 1, 2020. The Indian basket of crude oil was pegged at $59.70 per barrel in October 2019, rising to $62.54 per barrel in November and to $65.52 in December. It is currently hovering around $70 per barrel.

The price of benchmark Brent oil went up to $71.75 per barrel after Iran retaliated against the U.S. by attacking the latter’s bases in Iraq, but softened to $67.50 a barrel after Iran said that it did not want to further escalate the tensions.

“I think based on the demand-supply scenario, crude oil prices should be around $65 a barrel but we have to add a risk premium of $5 a barrel for few months due to geopolitical tensions between U.S. and Iran. I think Iran will play a proxy war with the U.S. in the coming months,” Mr. Abhishek Bansal, CMD, Abans Group of Companies told The Hindu. According to Mr. Bansal, higher crude oil prices is ‘bad news’ for the Indian economy that imports over 85% of its crude oil requirements. “Higher crude oil prices will be bad for our current account deficit and it will further tighten our fiscal situation. Further, divestment of oil PSUs will become difficult due to higher crude oil prices,” said Mr. Bansal.

Earnings impact

Rising crude oil prices could impact corporate earnings of several sectors, including auto and oil marketing companies, according to analysts.

However, Sanjiv Bhasin, director, IIFL Securities, believes that the market had already priced in crude oil prices for the above sectors.

“Oil has been extremely over-bought and it’s the best time to sell crude oil as it neared $72 a barrel. I think crude will go down by the end of this month,” Mr. Bhasin said.

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