As the OPEC+ members plan to cut crude production to jack up prices, the Indian government will be forced to increase the import of discounted Russian crude to keep the petroleum prices low in the country. The Russian oil share in India’s import basket has climbed to 21% from just 1% before the beginning of the Ukraine war. India gets Russian oil at a deep discount of around $15-20 a barrel.
Saudi Arabia was the top supplier to India in September, followed by Russia, Iraq and the UAE. U.S. share has come down to 4% in the Indian market from 10% a year back.
The U.S.-led global move to cap prices of Russian crude will also impact the prices of crude from Gulf countries as Russia plans to snap supplies to the countries which cap its prices. The G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the European Union) is working to set a price cap to limit Russia’s revenues and ability to fund the war in Ukraine.
In addition, the European Union’s embargo on Russian oil will be effective from December. The sanctions will ban seaborne imports of Russian crude oil from December 5 and petroleum product imports from February 5, 2023. In this context, more crude from the Middle East will flow to Europe to offset the Russian imports.
The central oil minister Hardeep Singh Puri on Wednesday said that India will examine the price cap on Russian oil proposed by the West. However, the oil marketing companies are putting pressure on the government to keep away from joining the global chorus to cap Russian oil prices as it would increase their costs and add financial stress on the Indian economy. The Brent crude, which was at $123 a barrel on June 9, fell to $82.8 on September 26 but increased to $90.9 on Wednesday.
On October 5, OPEC+, which includes Saudi Arabia and Russia, decided to cut oil output by 2 million barrels per day from November to lift the prices. US President Joe Biden threatened “there will be consequences” for OPEC+’s decision, but Saudi expressed “total rejection” of the statements from Washington. The OPEC+ members said the decision was unanimous, based on economic considerations, and absolutely not political.
High crude prices will have a direct impact on India's foreign exchange outgo, fiscal deficit and inflation numbers as the country imports around 85% of its annual oil requirement.
From the point of view of companies, Indian refiners like Reliance Industries (RIL), Indian Oil Corporation, Hindustan Petroleum Corp and Bharat Petroleum Corp will have to cough up more to buy the expensive crude. They also will have to try hard to ensure their margins amid fluctuations in prices. The high price scenario will help exploration and production companies like ONGC and Cairn India to bulk up their bottom line. The rising fuel prices will directly affect cement makers as well as automobile manufacturers.
India, the third largest crude oil importer and consumer, had reduced central taxes in the recent past to control the prices of petrol, diesel and LPG. However, it will not be an option for the government as it has been struggling to bridge the fiscal deficit and control rising inflation. The high fuel prices will escalate the cost of essential goods and affect consumer spending. It will in turn have a huge impact on the government's income from excise duty. Another trouble is the weakening rupee against the dollar. The rupee fell to hit a record low of 83 from 79.7 in the last month. It will also affect the country's crude financing abilities.
