The Indian retail consumers have so far been shielded from the crude oil price spike as the government has kept the petrol and diesel prices unchanged. But, according to Kotak Institutional Equities (KIE), it might change soon.
The brokerage expects a price hike in retail prices of petrol and diesel after the state elections in the absence of a truce in West Asia. Currently, Brent crude oil prices are trading at $104 per barrel as the Strait of Hormuz remains shut following a lack of progress in peace talks between the US and Iran.
The Strait of Hormuz is a critical route, accounting for about 20% of daily global oil supplies and 40% of Indian crude imports.
Iran’s 17 April announcement to allow transits through the Strait of Hormuz led to a sharp correction in oil prices. But the standoff has since worsened. While US President Donald Trump extended a ceasefire between the countries following a request by Pakistani mediators, Iran and the US are still restricting the transit of ships through the Strait.
According to a Reuters report today, 23 April, traffic through the Strait of Hormuz ground to a halt on Thursday after Iran fired on commercial ships and said it had seized at least two vessels — a first in nearly eight weeks of war. KIE said that physical oil markets are likely to remain tight, and a normalisation of flows appears unlikely in the absence of a comprehensive truce.
Impact of rising crude prices on India
As a result, the Indian crude basket rose by US$47/bbl in March and US$53/bbl in the first half of April. Despite a 13-15% decline in imports, India’s crude import bill has increased by $190-210 million per day, according to estimates by the brokerage.
While there is a compelling case, retail petrol and diesel prices have remained unchanged. Domestic LPG and ATF hikes have also been modest, and the key relief has been a ₹10/litre excise duty cut, but that has only provided partial relief.
According to KIE’s calculations, refiners are facing an increased burden of ~ ₹270 billion per month. “Elevated oil prices warrant commensurate retail fuel price increases to contain refiners’ losses and signal demand moderation. However, retail petrol/diesel prices remain unchanged,” the brokerage added. Therefore, a price hike is warranted to limit refiners’ losses and signal demand restraint.
Petrol, diesel price hike seen at ₹25-28/litre
Against this backdrop, Kotak believes that the case for a petrol price hike is there, but timing would be crucial.
“We believe after the state elections (last voting on April 29), and if there is no truce in West Asia, the retail prices will be hiked. Based on an Indian basket of US$120/bbl and low fixed margins (US$8/15 per bbl for petrol/diesel), there is a case to raise prices by Rs25-28/litre,” it said.
However, political considerations will likely prevail, and actual hikes may be more modest, it added.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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