Crude oil rise may force price hike

The case for a hike in the prices of subsidised petroleum products "" petrol, diesel, kerosene, LPG "" became stronger as the price of the basket of crude oil that Indian refiners buy neared the $73 per barrel mark on Thursday. The price was below $70 per barrel through most of August. There are, however, conflicting signals on hike in the prices of fuel.

While agency reports said the petroleum ministry was preparing a Cabinet note to make a case for a hike, an oil ministry official told Business Standard "nothing has been discussed or decided so far."

The international price of crude oil has crossed the $76 per barrel mark. "This is because crude and gasoline inventories in the US are believed to have dropped last week after Hurricane Dean disrupted supplies. Till the inventory data are out, the rise is likely to continue," said a Delhi-based analyst. 

PRICE OF INDIAN CRUDE OIL BASKET
Monthly average	($/barrel)
September (so far)	72.00
August	69.03
July	72.69
June	68.19
May	65.74
Quarterly average
April-June	66.52
January-March	56.50
Yearly average
FY08  (so far)	68.43
FY07	62.46
FY06	55.72

The price of the Indian basket of crude and Brent crude are just a couple of dollars short of their all-time highs. However, a petroleum ministry official said, "While last year, oil bonds were considered along with a hike in the prices in June, this year there will be only bonds and no price hike, till December at least."

The oil marketing companies continue to suffer losses as they are not allowed to sell at market prices. At last count, the three public sector oil marketing companies (IOC, HPCL, BPCL) together were losing around Rs 180 crore a day. This is likely to rise as the price of the Indian basket of crude oil has averaged $72 this month, compared with $69.03 in August.

The government, however, is looking at working out a way to minimise the losses of the three companies by changing the proportion of sweet and sour oil in the oil basket.

"Changing the percentage of the mix will help the oil marketing companies, which also own and operate refineries, earn better margins. However, the under-recoveries will not be affected as they are based on the difference between international and domestic prices," the ministry official said.

The Indian basket comprises Oman-Dubai sour grade crude oil and Brent dated sweet crude in the ratio of 58:42. The proposal is to increase the quantum of sour grade oil as sour crude oil is $4-5 a barrel cheaper than sweet crude oil.

Reliance Industries, which operates a 33-million-tonne per year refinery at Jamnagar in Gujarat, primarily processes sour grade crude oil, which pushes up its refinery margins to around $15 a barrel. The margin of the government-owned refiners is around $7 a barrel.

The sweet-sour crude oil mix of the Indian crude oil basket is reviewed every year as the import profile changes. The government-owned refiners are upgrading their refineries to process more sour crude oil.