Here’s why petrol, diesel haven’t become cheaper for 45 days, despite global crude oil price fall | INTERVIEW

By 夜上海论坛
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The historic rout in oil markets sent the US crude oil prices to negative USD 40 a barrel. The collapse in oil prices can prove to be a boon for India as it is the time for the country to fill its strategic reserves with cheap oil. Sugandha Sachdeva, VP, Metals, Energy Currency Research of Religare Broking Ltd explains why state-controlled oil marketing companies (OMCs) refrained from changing the petrol and diesel prices in India for over 45 days. She also elaborates the buying opportunity in oil marketing companies stocks and advises investors to invest in a phased manner. Here are the excerpts of Sugandha Sachdeva 1. Is collapse in crude oil price a blessing in disguise for India? Crude oil prices have witnessed an absolute collapse due to the double whammy of significant demand devastation due to the coronavirus crisis gripping the world economy, coupled with a massive supply glut. On one hand, lockdown situation for almost 90% of the world and travel curbs has sapped the demand for oil and on the other hand, producers have continued to pump record amounts of oil. Alongside this, storage constraints in the US have led to the unprecedented decline in oil prices sub-zero levels. As India is the third-largest importer and consumer of crude oil, which imports more than ~80% of its requirement, sharp decline in oil prices would be a windfall for the economy if prices remain at lower levels for rest of the year, considering the fact that global growth is likely to remain subdued this year. It would continue to import crude oil in a measured way around the current rates ($20-25\/barrel) to fulfil its requirement in future and that would help in improving the country However, as demand has plummeted severely due to the lockdown, and storage is also a constraint, India may not be able to get significant benefits, due to this sharp decline in prices in the short term. The caveat here is that if the lockdown is extended, there would be no revenues to the government if no one buys petrol. Also, steep depreciation in rupee and decline in FII flows from Middle East sovereign funds has offset some of the gains from the recent decline in oil prices. 2. Is it a time for India to boost strategic reserves? The dramatic crash in oil prices shall act as a boon for India supporting its efforts to boost energy security efforts. It India currently has a total capacity to store 5.3 million tons at Visakhapatnam, Mangaluru and Padur supporting 10-12 days of our net imports. Government is in a process to fill these reserves with the recent deliveries and has also advised state refiners to place their excess crude supplies to these reserves. The only challenge is the limited time left to ship buys to its storage facilities as the offloading at this port may not happen once the monsoon breaks. Government is setting up an additional 12.5 MT storage capacity in the second phase in Odisha, Rajasthan and Gujarat adding 12 days of crude storage. In the current scenario, it Even downstream oil companies can look at locking in the price today via hedging. 3. Why petrol, diesel prices in India havent changed in over 45 days despite crash in oil prices amid scanty storage? The historic collapse seen in US crude oil futures does not mean proportionate fall in domestic petrol and diesel prices as well. Firstly, the Indian basket of oil is dominated by the Brent crude oil prices, which were still trading higher in comparison to WTI oil prices even when prices slipped into the negative territory. The problem was peculiar to WTI May contract, due to the storage constraints at Cushing, Oklahoma. Secondly, even though Brent prices have slipped by 60 % since the beginning of this year, but petrol and diesel prices have not fallen in line as their pricing includes a huge component of domestic charges including taxes and duties. Also, amid nationwide lockdown, the government is trying to mop up more taxes from fuel to offset losses from low tax receipts otherwise. In fact, the government has recently increased excise duty on petrol and diesel by Rs 3 per litre and can further raise it by Rs 8 per litre in future. Additionally, road cess was also hiked by Rs 1 per litre, each on petrol and diesel to Rs 10. Furthermore, oil marketing companies have been badly hit due to low demand and huge existing inventories and in order to make up for those losses, they are not passing the benefit of low oil prices to the retailers. 4. Goldman Sachs warns of another crash in crude oil prices. Your comments. The bizarre crash witnessed in WTI May contract did spill over to the June contract and resulted in a further squeeze with US ETFs shifting to contracts for later delivery. The fundamental drivers behind the ailing oil markets still remain the same as they were last week, where demand remains quite feeble as the global economy is in a standstill mode, with literally no space for storage. Sentiments remain quite fragile in oil markets, however, there is some light at the end of the tunnel here- Firstly the prognosis here is that oil producers facing a shortage of storage space will