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Petrol price cut: Brent below $80/bbl, is the time ripe for Modi govt to cut fuel prices before elections?

With Brent Crude edging below $80 per barrel, the Narendra Modi government may look to give Indian consumers a much-needed respite and cut fuel prices ahead of the general elections due to take place in the summer of this year, a report said on Wednesday.

The Bharatiya Janata Party, looking to regain power at the Centre for a third consecutive term, may have enough space in its wallet as it looks to bring down the cost of living in the country, TOI reported.

The respite would be a welcome move for consumers in India where retail inflation rose to a four-month high of 5.69 per cent in December. To be sure, the reading is just within the Reserve Bank of India’s stipulated tolerance band of 2-6 per cent and much above the targetted 4 per cent mark.

The escalating prices pose a worry for Prime Minister Modi’s government, especially in light of upcoming nationwide elections in the next few months. In an effort to control prices, his administration has implemented export restrictions and imposed limits on stockpiling for various products.

State-run oil marketing companies, which control 90 per cent of the market, are seeing good times given the sharp decline in oil prices since September 2023. Rating agency ICRA said this sharp decline has upped the OMCs’ marketing margins to Rs 11 and Rs 6 per litre on petrol and diesel, respectively. They are now reversing the double-digit losses experienced when crude prices inched higher since February 2022.

Ripe for a cut?

Data shows that oil prices in the global market have remained favourable, contrary to the expectations. The International Energy Agency in its latest monthly oil report forecast the supply of oil globally to likely outstrip demand this year, indicating ample supply in the market. In addition, the OPEC+ coalition foresees a balanced market. With the new government having the next 12 months until March 31, 2025, to navigate its financial considerations, this presents an opportune moment—both economically and politically—to reduce fuel prices. Brent was trading around $79 per barrel on Tuesday. The resurgence in OMCs’ profitability can be attributed to benchmark crude prices remaining below $80 per barrel. Prices have been trending lower owing to a subdued demand outlook and increased production in Libya and Norway. These factors have, to some extent, alleviated concerns about the possibility of a broader conflict erupting in the Middle East.

Petrol and diesel rates have remained unchanged since May 2022, following the Centre’s second excise duty reduction to mitigate the effects of crude oil which surpassed $100 per barrel at the time due to the Russia-Ukraine conflict. Despite fluctuations in oil prices causing fuel retailers to experience both losses and profits, pump prices have remained constant even during periods of low oil prices when selling petrol and diesel was profitable.

State-run retailers such as HPCL, BPCL and IOCL registered profits between July and September 2023 and again after October. The OMCs did not jump to cut pump prices despite the Assembly Elections taking place in as many as five states, in a bid to recoup past losses. Jio-bp and Nayara cut fuel prices by Re 1 per litre.

Brokerages and the International Energy Agency predicted the oil market to tighten by the end of 2023 and in early 2024. TOI reported that retailers were given the leeway to accumulate a profit buffer to safeguard against potential losses should the crude prices jump as forecast.

If prices had been cut then, it would have been difficult to raise them again before the Lok Sabha polls if oil prices hardened as projected, TOI claimed.

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