Benchmark oil rates are once again the talk of the town amid renewed US-Iran escalations that are fuelling fresh supply concerns across Asian markets, including India.
Should the humble Indian consumer — who follows a strict monthly petrol or diesel budget or has imminent air travel plans — worry amid growing concerns about inflationary risks related to the Middle East conflict?
For now, analysts are staring at nine straight days of strikes between the US and Iran that have effectively reversed a fragile ceasefire brokered in mid-June.
First things first, crude oil update (July 20)
Global oil benchmark Brent crude rose as much as 3.3 per cent to $91.1 a barrel in Monday’s trade, crossing the $90 a barrel mark in intraday trade after around 40 days and taking its rebound to 26.5 per cent from its recent lows.
Yet, it was about 28 per cent off a four-year peak reached earlier this year before the June 17 ceasefire.
Elevated oil prices are a major headwind for India, which meets more than four-fifths of its oil demand through imports.
All eyes on Strait of Hormuz
Only a fraction of the normal commercial vessel traffic was reported to be active in the Strait of Hormuz this week. The strait — a sea route that links the Gulf of Oman with the Persian Gulf and the Arabian Sea — has been central to the West Asia conflict, which began with joint American-Israeli strikes on Tehran that killed its Supreme Leader on February 28. Typically, disruptions in the strait — a crucial maritime region that connects the Gulf of Oman with the Persian Gulf and the Arabian Sea, and normally enables the transit of one-fifth of the world’s oil and gas supply — create ripples across global energy prices.
The Centre recently adjusted a set of windfall export duties and sources say it is mulling measures worth Rs 4 lakh crore to strengthen its oil and gas storage infrastructure and enhance its inventories.
Rising crude oil a major negative for Indian markets
“Escalations have risen… Crude oil is past $90 a barrel… In two days, three US soldiers were killed in these clashes,” market veteran Ajay Bagga told Zee Business.
“The spike in crude is negative for Asian markets including India,” he said, warning that the fear of further escalation is likely to keep markets on edge for now.
His remarks came amid reports that US military attacks on Iran were not limited to military-related assets with damage reported to civilian infrastructure. Iran continued to retaliate by targeting ships in the Strait of Hormuz.
“In 2 days, 3 US soldiers were killed in escalations… For India, the challenge is rising crude oil inflating its import bill. The fear of worsening escalations is likely to persist in the Indian market for now,” said Bagga.
Market expert Sugandha Sachdeva pointed out that the resumption of strikes has sent crude prices back up into the $90s this week from around $72-odd levels earlier this year as both sides agreed to an interim peace deal.
Earlier this year, India successfully protected consumers against disruptions in auto and cooking fuel by ramping up domestic production and diversifying its energy imports. Sources said plans worth lakhs of crores are now on the cards to strengthen the storage infrastructure for LPG, LNG and petrol while enhancing buffers.
The oil ministry is learnt to have started inter-ministerial consultations in this regard and is planning to create a dedicated fund for the purpose, they added.
Analysts say such moves are seen as shielding the economy better against geopolitical shocks like the current crisis in the Middle East, though India has successfully managed to protect its retail prices by ramping up domestic supplies and diversifying imports.
Last week, the Centre revised export duties that act as a windfall tax on petroleum product shipments. Those adjustments, effective July 16, are as follows:
- Diesel export duty or Special Additional Excise Duty (SAED) on diesel, raised to Rs 15.5/litre from Rs 8.5/litre
- ATF export duty increased to Rs 14.5/litre from Rs 7.5/litre
- Petrol export duty lowered to Rs 2.5/litre from Rs 4/litre
What SAED is and what these windfall changes mean
Special Additional Excise Duty (SAED) is an export-facing levy applied on petroleum product shipments. It is distinct from excise and state taxes levied on fuels sold domestically.
This levy targets exporters’ margins rather than retail transactions within India, raising the cost of moving locally refined fuel to international markets.
All in all, it discourages exports when domestic security of supply is a priority.
Authorities review and tweak windfall taxes from time to time, aligning them with global crude and product prices in order to safeguard domestic fuel availability and inflation.
Will retail petrol and diesel rates rise? Will airfares be impacted?
The recent windfall tax-related changes are expected to have a limited direct impact on retail fuel prices in the near term, according to Sachdeva.
“The move could weigh on the profitability of oil marketing and refining companies that derive significant earnings from exporting diesel and ATF. Higher export duties are likely to compress export margins and reduce realisations, particularly for refiners with a larger export-oriented product mix. Overall, the policy underscores the government’s focus on balancing domestic fuel security with inflation management amid a volatile global energy environment,” said Sachdeva.
Meanwhile, Prime Minister Narendra Modi highlighted on Monday how, amid severe global anxieties stemming from the West Asia situation, massive disruptions across petrol, diesel, LPG, fertiliser and chemical supply chains posed a profound threat to the energy-dependent nation.
Despite these intense international obstacles, he underlined the country’s phenomenal 7.7 per cent growth rate as a testament to its resilience and capability. He was addressing the media before the start of the Monsoon Session of Parliament.