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Petrol, diesel prices unlikely to stay higher over the long-term, say analysts

The oil prices are unlikely to remain at high levels over the long-term, say analysts, unless the ongoing geopolitical situations in the Middle East worsen in the coming weeks

twitter-logo PB Jayakumar   New Delhi     Last Updated: October 11, 2019  | 14:32 IST
Petrol, diesel prices unlikely to stay higher over the long-term, say analysts
Although Brent crude had skyrocketed in intraday trade in an immediate reaction to the Saudi Aramco attacks, it has started to come down by Tuesday early hours.

The petrol and diesel prices in the country may witness a spurt in the coming days as a fallout of drone attacks on the world's largest refiner Aramco's Abqaiq plant and Khurais oil fields in Saudi Arabia. However, the oil prices are unlikely to remain at high levels over the long-term, say analysts, unless the ongoing geopolitical situations in the Middle East worsen in the coming weeks.

"Since Saudi Aramco supplies 10 per cent of the global crude, there is going to be an impact in global markets and in India as well. Petrol and diesel prices in the country may witness an increase by Rs 2 to Rs 3 in the coming ten days," said Anuj Gupta, deputy vice president - commodities and currencies research, Angel Broking. Public sector oil marketing companies such as Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) are yet to respond to the development.

Brent crude price had skyrocketed nearly 20% in intraday trade in an immediate reaction to the attacks, the biggest jump in almost 30 years. It closed nearly 15 per cent higher at $69 per barrel, a four-month high. It has started coming down, registering a drop of nearly 2 per cent by Tuesday early hours.

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Ronen Banerjee, partner and leader, Public Finance and Economy with PricewaterHouse Coopers said the current spike should be seen as a short-term and temporary reaction to the development. "Oil marketing companies buy crude on futures trading commitments and periodic supplies are based on those contracts. I believe even if there is going to be a major impact, it will be visible to the public only after a month or so," he said.

Globally, pressure mechanisms will be at play to bring down the prices of oil. Already the US has expressed its readiness to release its oil reserves, if there is a crisis. "At present we don't have information on how early Aramco can restore supplies to the earlier levels. If the situation persists, it will have an impact on oil prices as oil marketing companies will pass on the rise in raw material costs to its consumers," he said. An overall inflation can happen as all petroleum products will become costlier, which will have a ripple effect on various manufacturing, which are grappling with economic slowdown, he said.

Saudi Arabia is the second-biggest oil supplier to India after Iraq. India bought 40.33 million tonnes of crude oil from Saudi Arabia in 2018/19 out of a total of 207.3 million tonnes. India imports over 80 per cent of its crude oil requirements. A $10 rise in Brent prices will cost Indian imports dearer by $15 billion and current account deficit may widen by 0.4-0.5 per cent of gross domestic product (GDP), estimate analysts.

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"If the outage lasts for a week, the impact on prices will be shallow. However, if the outage lasts for more than two-three weeks, then Brent crude oil can spike close to 75-80 dollars a barrel," said a report by brokerage Kotak Securities.

The analysts feel that we need to keep a close eye on US-Saudi military response to track the medium-term impact of the Saudi attack. If the response is directed towards Houthi rebels in Yemen, oil traders and rupee traders do not have much to worry. However, if this leads to a conflict with Iran, oil prices can spike immensely, which will sustainably be negative for India, especially rupee, which is highly sensitive to oil prices due to our large dependency on imported oil and consumption-driven economy.

"Higher oil prices are like a tax on consumption, not a good news for an economy already reeling under slowdown of private consumption. However, with Brent crude oil prices well below $80 per barrel, the impact on India would not be significant," said the Kotak report.

ALSO READ:Petrol, diesel prices may jump Rs 5-6 per litre due to Saudi Aramco drone strikes

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