Petrol, diesel prices may rise further; IOC says demand recovery faster than anticipated

NEW DELHI : Indian Oil Corporation Ltd (IOC), the country’s largest fuel retailer on Wednesday said that transportation fuel prices may continue to go up due to international crude oil prices being on an upswing.

IOC, also the country’s largest refiner said that demand recovery has been faster than anticipated, and its capacity utilization, which had shrunk to around 35% at the beginning of the coronavirus lockdown is expected to run at full capacity by June end.

The Indian economy is attempting a gradual return to normal after the lockdown. India’s power and overall energy demand, which had nosedived, is also slowly returning to its pre-lockdown levels. Consumption of energy—especially electricity and refinery products—is typically linked to overall demand in an economy.

This comes in the backdrop of the state-owned oil marketing companies (OMCs) increasing fuel prices daily, after pausing for nearly three months during the world’s most stringent lockdown. While petrol price hike was paused on Wednesday after increasing for 17 straight days, diesel price was again raised for the record 18th straight day by 48 paise per litre, making it more costlier than petrol in the national capital.

While diesel costs ₹79.88 per litre in Delhi, petrol is priced at ₹79.76 a litre.Explaining the rationale behind the spike in petrol and diesel prices, IOC chairman Sanjiv Singh said that with the international demand picking up, parallely the crude oil prices are also going up.

Retail prices of petrol and diesel in India track global prices of auto fuels, not crude, though they are broadly linked to the latter’s price trends.Singh added that it is quite likely that the prices may still go up and it was a difficult question to answer, given that the prices depend on a variety of reasons such as crude oil prices.

The international benchmark, Brent crude, traded at $42.09 per barrel on Wednesday and the US West Texas Intermediate (WTI) was at $39.76 per barrel at the time of going to press. Brent crude had hit a 21-year low and the US oil futures slumped to negative for the first time in April as the glut overwhelmed the world’s limited storage facilities, triggering massive selling by traders.

With the world slowly reopening businesses, oil prices have been up after April’s downward spiral, when demand almost vanished. The cost of the Indian basket of crude, which comprises Oman, Dubai and Brent crude, averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively. It was $19.90 in April and $30.60 in May, according to data from the Petroleum Planning and Analysis Cell. The price was $43.41 a barrel on 23 June.

Singh said that while IOC held the price increase during the lockdown the states contributed to the price increase.

As the world’ largest lockdown bills pile up, state governments across India’s political spectrum took difficult decisions to shore up revenues, ranging from increasing value-added tax (VAT) on transportation fuel to introducing liquor cess. However, the union government also raised the excise duty on petrol and diesel to mobilise revenue collections.

Singh said that when the the margins were running negative, following the standards was not workable.“That’s the reason why a call was taken to hold the prices,” he said and added, “Negative margins was something that we had never seen, so we had to hold the prices at certain level.”

India’s three state-owned OMCs—Indian Oil Corp Ltd (IOCL), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL)—had also refrained from raising prices during the national and state assembly elections.

IOC’ capacity utilization has also picked up and is currently around 83% as India’s economic engines whirred back to life with the easing of lockdown restrictions.Addressing a press conference on Wednesday Singh said that with public transportation not being in operations, the increased usage of private vehicles has contributed to the quick recovery in petrol demand.

With the world’s second most populous country cooped indoors, the demand for transportation fuel such as diesel and ATF has been subdued.“Some consumption patterns will still corrected with time, as life gets normalised,” Singh said and added, “Now onwards, the recovery will be driven by other sectors.”