The recent global crude oil price spike may have rung alarm bells in the corridors of power but experts say that the latest upward movement may be temporary with prices coming back to normal range in the weeks ahead in an over-supplied market that would also beat expectations of a pick-up in demand.

Last week, the US market recovering from the double whammy served up by hurricanes Harvey and Irma, processed more crude to meet the demand, pushing up oil futures 5.1 per cent in New York, settling above $ 50 a barrel for the first time in five weeks. The Brent crude (the equivalent and more globally used benchmark set daily in London) has also risen and is fast approaching $ 56 a barrel. The Indian basket of crude has also moved up to reach closer to $ 55 a barrel, the highest so far in the year.

Adverse impact

“Any increase in oil prices is bound to have adverse impact on India that imports 80 per cent of its requirements. But the current spike, particularly in refinery margins, is because of disruption in refinery capacities in the US on account of the recent hurricane activity. Otherwise oil remains an oversupplied commodity, which would be range bound within short to medium term,” said Debasish Mishra, partner, Deloitte Touche Tohmatsu India LLP.

Along with the rise in crude oil prices, disruptions in US also pushed up benchmark prices for products (petrol and diesel) and increased refinery margins. This, he said, should come back to normal as 13 per cent capacity affected in US has come back on stream now and would refinery margins down by $ 2-3 per barrel. This would be good news for auto fuel consumers in India as lower refinery margins could push down petrol and diesel prices by up to Rs 2-3 a litre.

While the recent spike in oil prices has alarmed the government, it is worth noting that fall in crude prices has resulted in big savings for the country in FY16. India’s import bill nearly halved to $ 64 billion in FY16 even though the country imported 202.1 million tonnes of crude oil in the fiscal year. This was higher, compared to import of 189.4 million tonnes of crude oil for $ 112.7 billion in the previous FY15. Last year the import bill, however, rose marginally top over $ 70 billion.

The lower import bill came on average crude price of around $ 46.17 a barrel in FY16. In FY17 the average crude price increased marginally to just over $ 47 a barrel. A still higher crude price could not only raise import bill, together with lower tax collections, this could hurt fiscal deficit target of the government for FY18. The deficit target for current year has been kept at 3.2 per cent of GDP.

Inflation

But if the government decides against cutting tax on petroleum products, it could stoke the fire of inflation. Both consumer price inflation and wholesale price inflation are up largely on account of rising fuel and food prices. Lower oil price is good for India as the country’s import bill varies substantially if there is either a spike in global oil prices or rupee depreciated during the year against dollar.

"If crude prices increase by $1 per barrel, net import bill increases by Rs 7,096 crore ($1.14 billion). And if exchange rate increases by Rs 1 to a dollar, net import bill increases by Rs 7,440 crore ($1.18 billion)," according to a report of petroleum ministry’s Petroleum Planning and Analysis Cell (PPAC).

Though the comfort is there on oil prices in balance period of the year, projections suggest that average oil prices this year would be higher than previous years and end up close to $ 50 a barrel.

“All the gains of lower oil prices could vanish if crude goes over $ 60. Lower oil prices allowed the finance minister to frequently raise excise duty on petrol and diesel and helped the government mobilise in excess of Rs 1.4 lakh crore in last two years. This advantage would be lost if oil prices rise. With lower tax buoyancy, reduced duty could hurt government’s fiscal,” B.K. Chaturvedi, former, member (energy), Planning Commission told FC earlier.

Another oil analyst, however, presented a more comforting picture for India on the oil front. “The oil market looks range bound even in FY18 between $45 to $55 a barrel mark as a spike is not expected in a well supplied market that is also getting increased production from OPEC members such as Nigeria and Libya that are not bound by production cuts. Moreover, US production is also expected to rise after disruptions due to cyclone. This should negate any move by OPEC to affect oil price rise by extending production cut up to March next year,” said the analyst, declining to be named.