Why India can\'t gain from US oil price collapse

Why India can't gain from US oil price collapse

Retail fuel prices in India have remained unchanged for weeks, as the demand is almost a fraction and the government is not able to realise the benefits from price fall

He said the futures oil trading on MCX CCL trading exchange in the country is also 'very very negligible'

KEY HIGHLIGHTS

  • US WTI crude futures prices slide to minus $37.63 a barrel
  • India goes by Brent crude benchmark and Indian refiners don't hedge much
  • Indian refiners have excess raw material; not in a position to stock
  • Retail fuel prices to have no impact as India in lockdown at least till May 3
  • Brent crude may fall to $20 per barrel in a few weeks, say analysts

Crude oil prices in the US may have fallen to a historic minus $37.63 a barrel on Monday due to coronavirus-related demand issues and inability to store for future use, it will have a 'nil or very marginal' impact on the Indian economy and fuel prices, say experts.

The main reason is Indian oil companies, mainly public sector oil companies, are not dependent on West Texas Intermediate (WTI) benchmark index. Their lion's share of purchases are from the Middle East, mainly Dubai and Oman axis, and are based on Brent crude benchmark prices - the latest at $22.41 per barrel and the Indian basket priced at $20.56 per barrel. The Middle East dominated OPEC-plus countries that include Russia have already announced a nearly 10 per cent cut in production to lift the dipping crude oil prices.  

"Already we don't have demand due to lockdown and our oil marketing companies (OMCs) like BPCL, HPCL and Indian Oil Corporation (IOC) do not engage much in risky futures hedging and go for safe six months to one year contracts, whereas global norm is about three months. In India, oil demand due to lockdown has fallen by over 40 per cent because petrol and aviation fuel consumption is very less, and only diesel has some sale due to logistics of essential goods," says Deepak Mahurkar, leader, India oil and gas industry practice, at PricewaterhouseCoopers (PwC). He said the futures oil trading on MCX CCL trading exchange in the country is also 'very very negligible'.

In India, retail prices of fuel have negligible bearing on the global prices as major portion of the retail prices  comprises taxes to the states and Centre. Retail fuel prices in India have remained unchanged for weeks, as the demand is almost a fraction and the government is not able to realise the benefits from price fall.

K Ravichandran, Senior Vice-President and Group Head for Corporate Ratings at ICRA noted that crude prices could slide to about $20 per barrel over the next couple of weeks, but neither the government nor the OMCs could make benefit out of it, as it is dependent on how early India escapes from the full lockout. Already Indian oil refiners are operating much below their refining capacities and tankers are waiting in the seas to berth, as storage tanks are full.

"Even if we think of strategic storage to leverage falling prices, our reserve capacities are not more than 5.3 million tonnes (MT) for three months, which is a small portion of our overall 200 MT plus purchases. When there is no demand and have full storage, who will buy fresh crude?" he said.

They said the fall in US oil prices is a temporary issue, mainly due to expiry of May WTI futures contracts. There are no buyers in the market and sellers are compelling them to take stocks to clear their full storage tanks. Oil consumption across the globe has fell sharply due to corona pandemic and many countries are in the lockdown. However, logistics and supplies of the fuel have not been affected in most countries and it is not easy to shut down oil producing wells, said sources.

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