Indian crude oil at 4-month low to cut govt subsidy burden

Price has plummeted to $54.41 per barrel

The Indian basket of crude oil price has plummeted to $54.41 per barrel, its lowest in four months, on the back of multiple factors, including a contraction in the manufacturing sector in China, the world’s second-largest consumer of crude after the US.

A stronger US dollar has also made non-US investors to sell commodities, pressuring prices already impacted by the global oversupply concerns from the just-concluded Iranian nuclear deal.

The Indian basket represents the average price of Oman and Dubai sour grade crude and the sweet Brent crude oil processed in Indian refineries in the ratio of 72:28.

It stood at $54.41 per barrel on the last trading day of July 24, falling from a peak of $66.54 per barrel on May 6, and the lowest since April 2 price of $54.77 per barrel.

“The government had budgeted for an average crude price of $70 per barrel for this financial year.

If the average price of $60 per barrel in the first four months (April-July) is sustained, we are looking at Rs 65,000 crore savings in import bill for companies, and around Rs 9,000-crore (Rs 90-billion) savings in the subsidy bill for the government,” said K Ravichandran, senior vice-president at research and ratings agency ICRA.

Currently, every $1 decrease in crude prices pulls down import bill by Rs 6,500 crore (Rs 65 billion) and the government’s subsidy burden by Rs 900 crore (Rs 9 billion).

• The People's President

However, the benefit would be limited by the ongoing depreciation in rupee value.

The Indian currency on Monday fell to a six-week low closing at Rs 64.17 against the dollar.

Currently, every Rs 1 increase in the exchange rate of dollar increases oil import bill by Rs 7,455 crore (Rs 74.55 billion), according to Petroleum Planning and Analysis Cell, an arm of the oil ministry.

Ravichandran also said the decline in crude prices is positive for Indian refiners -- Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation -- as their working capital requirements would reduce due to lower crude oil and product prices and lower gross under-recoveries or loss suffered on subsidised sales of petroleum products like liquefied petroleum gas and kerosene.

“Lower GURs for refiners would also mean reduced subsidy burden sharing for upstream companies like Oil and Natural Gas Corporation.

"The government has already exempted upstream firms from LPG subsidy sharing and limited the kerosene subsidy sharing to Rs 12 per litre for them.

"However, reduced crude prices would also expose ONGC’s overseas arm ONGC Videsh (OVL) and impact realisations from value-added products for ONGC,” Ravichandran said.

The oil marketing companies under-recoveries came down from Rs 139,869 crore in 2013-14 to Rs 72,314 crore (Rs 723.14 billion) last financial year, thanks to diesel deregulation and the roll out of Direct Benefit Transfer in LPG scheme.

In the current financial year, the government is budgeting for a petroleum subsidy bill of Rs 30,000 crore (Rs 300 billion), including Rs 22,000 crore (Rs 220 billion) on LPG sales, and the rest on kerosene.

• The People's President