Government Sources: Retail Fuel Price Hikes Expected Soon

According to govt. sources, retail prices of petrol would be hiked by Rs 4 per litre and that of diesel by Rs 2 per litre very soon over the coming few weeks. While the oil marketing stocks of IOCL, BPCL and HPCL have already started factoring in the inevitable hike expectations, the actual hike is most likely to come into effect post the last leg of elections in state of UP, which is expected to culminate over the coming days.

Dated Brent (Spot) crude oil prices which had shown some signs of cooling off towards the end of CY2011 have again threatened to spike up further and pose a real challenge on an already pressured global economy. At USD 124.5 per barrel Brent crude has rallied by 12 per cent on YTD basis. Consequently Nymex (futures) crude oil has also suddenly found some interest in the eyes of investors as it has also rallied by 12 per cent in the month of February.

With the International Energy Agency (IEA) continuously revising its global oil demand forecasts downward one may expect that the oil prices must soften keeping in mind the simple logic of demand and supply. However, in case of crude oil, given its sheer dominance in global trade and the value attached to the commodity know as ‘black gold’ the only possible explanation to this recent spurt in crude prices can be the rising geo-political tensions in the Middle East and North African regions (MENA) with Iran at the helm of it. Also an improving economic scenario in the US, since the start of 2012 has helped spur up the crude prices on back of expectations of increase in consumption activity in world’s largest economy.

While all the above mentioned reasons led to a rise in global crude prices and pressured the economic balance for most of the import oriented countries, India despite its over dependence on crude oil imports had much to cheer about at the start of the year. That was mainly due to the strengthening of the Indian Rupee against the US dollar which managed to make up some lost ground. At Rs 49.25 a dollar it is up by 8 per cent on YTD basis. However, since the start of February the rupee dollar battle seems to have died down as it can be seen that rupee for the current month has merely appreciated by 0.4 per cent. As discussed earlier Brent (spot) crude prices have risen by 12 per cent during the same period.

As a result of this, the domestic oil refiners have had to face some tremendous pressure by absorbing the losses on sale of fuel at subsidized rates. Though the govt. helped recover some losses by directing the upstream majors to foot in a larger share of the fuel subsidy bill and in the bargain score some grace points, the domestic refiners continue to report daily losses amounting to Rs 465 crore on sale of Diesel, Kerosene and LPG at subsidized rates.

The only de-regulated fuel – petrol – on which the oil marketers had the liberty to set retail prices as per the prevailing markets rates and reduce losses, also seems to have come under the whimsical and unconditional purview of the central govt. Since the last rate hike of Rs 1.8 per litre, taken way back on Nov 3rd 2011, Brent prices have appreciated by nearly 15 per cent, while dollar which had by then started its sharp downhill movements has stayed put at levels of Rs 49. Owing to the onset of political elections in key states and cities of the country, the govt. strongly refrained from undertaking any hikes and upset its vote bank.

However, now with the elections reaching its final stages, the govt. would have to give its so called un-conditional nod to the oil refiners and allow them to hike fuel prices (petrol & diesel) in a strategic manner to reduce losses. The sudden uptick in retail petro prices will in turn have an adverse effect on inflation as rate of price change in fuel categories will spur upwards. Inflation as per the latest CPI indicator has already dampened the hopes of a rate cut by the RBI during in next monetary review in March.