Fuel price cut coming? As crude slips to lowest since January, hope floats for Indian consumers

Oil prices have plummeted to their lowest levels since January, enhancing the profitability of fuel marketing companies and potentially setting the stage for a cut in pump rates ahead of the state elections in Maharashtra and Haryana, ToI reported on September 5. Benchmark Brent crude fell to $73.6 on Wednesday, staying near the year's record lows after a 5% drop on Tuesday due to concerns over weak demand growth, particularly in China.

Analysts are attributing the downturn in oil prices to several factors, including the return of Libyan supplies to the market, the Opec+ group unwinding voluntary production cuts from October, and increased output from sources outside the group have all contributed to the downward pressure, ToI's report (by Sanjay Dutt) said.

As oil prices remain a critical factor for the Indian economy, the situation is closely monitored by industry analysts, the government, and the public. Whether Modi government seizes this moment to push for another reduction in fuel prices will be seen in the coming weeks.

India's oil cos now have large manoeuvring space

Since January, the decline in oil prices has resulted in positive marketing margins for fuel retailers, especially state-run entities that control 90% of the market. The government leveraged this scenario to make the three state-run retailers — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — cut petrol and diesel prices by Rs 2 per litre on March 14, just before the general election.

The Indian OMCs had incurred major losses when crude prices were higher, and they had to hold back on a raise before the polls.

Even after this initial cut, a Motilal Oswal Financial Services report in April projected a gross marketing margin of over Rs 2 per litre for that month, as the Indian Basket of crude oil averaged $89.4 per barrel. This margin is likely to have increased since the Indian Basket averaged $76 in September, trailing Brent crude by $2-4 per barrel.

Oil companies make profit from two avenues. One is refining, where they earn a gross refining margin, which is the value of refined products at the refinery gate minus the cost of crude oil. The other is through retail pumps, where they earn a margin on the refined products.

Petrol price was decontrolled in 2010, linking it to global market prices, and that of diesel in 2014.

So, will there be an oil price cut?

There is, however, some debate on whether the government will push for another reduction in pump prices due to predicted volatility in oil prices. UBS, a financial services company, predicts that the oil market will remain under-supplied in the near term. Similarly, Goldman Sachs has forecasted that oil prices will fluctuate between $70 and $85 per barrel.

Even if the current low prices do not last, the government would still be well-positioned if prices stabilise at around $85 per barrel. This would allow the government to ask state-run retailers to keep pump prices steady. Oil Minister Hardeep Singh Puri has described this approach as retailers being "good corporate citizens," a practice observed over the last three years.

According to Puri, "Govt will be comfortably placed even if the current low prices do not last long but level out at $85, which will give it the leeway to ask the state-run retailers to keep pump prices frozen 'voluntarily’."

To be sure, crude oil prices remain vulnerable to various risks such as production cuts, political instability in certain regions, or escalations in geopolitical tensions. Significant fluctuations in fuel prices can cause disruptions, and analysts believe the government may adopt a wait-and-see approach for the coming months.