Surprise oil output cut by OPEC+ to delay price revision in India

The surprise decision of OPEC and its allies, including Russia, to cut oil output may cause an immediate rise in prices, delaying revision in fuel prices in India, industry sources said.

The grouping of Organisation of Petroleum Exporting Countries (OPEC) and its allies, called OPEC+, on Sunday decided to further cut oil output by around 1.16 million barrels.

The move led to Brent rising by almost 6 per cent to USD 84.58 per barrel on Monday.

This spurt will reverse the softening in rates witnessed in the basket of crude oil that India imports. The Indian basket was hovering in the range of USD 73-74 per barrel for most of the second half of last month and had brightened prospects of a cut in petrol and diesel prices.

"Public sector oil companies had been recouping losses they incurred for holding rates when crude oil prices shot through the roof. Last month, international oil prices and retail pump rates had come at par. But now with the prices rising, the difference between cost and retail prices will reappear," an industry official said.

India imports 85 per cent of its oil needs and its fuel pricing is indexed to international rates.

Petrol and diesel prices have been on a freeze for almost a year now. Petrol costs Rs 96.72 per litre in the national capital and diesel comes for Rs 89.62 a litre.

State-owned fuel retailers are supposed to revise petrol and diesel prices daily based on a 15-day rolling average of benchmark international fuel prices but they haven't done that since April 6, 2022.

Prices were last changed on May 22 when the government cut excise duty to give relief to consumers from a spike in retail rates that followed a surge in international oil prices.

Sources said if international oil prices had stayed around USD 73-74 a barrel range, oil companies would have re-started daily price revision.

Commenting on the issue, Prashant Vasisht, vice president and co-head - Corporate Ratings at ICRA Limited, said the decision by OPEC+ to announce additional production cuts of around 1.16 million barrels per day has resulted in a surge in crude oil prices.

"This could potentially fuel inflationary pressures on the economy," he said. "Since imports contribute to around 85 per cent of the total demand in India, the increase in crude prices increases the import bill and weakens the rupee against the US dollar."

However, upstream oil producers such as ONGC are expected to benefit owing to higher profits and cash accruals though a large part of the same is likely to be shared with the government in the form of special additional excise duties, he said.

"The downstream sector would be adversely impacted, and the oil marketing companies (OMCs) may start incurring marketing losses on the sale of diesel," he said.