Oil Prices Lose Steam In 2024 Despite Rising Geopolitical Risks; Will Prices Of Petrol, Diesel Slump?

Geopolitical crises tend to drive crude oil prices. This was the case when Russia invaded Ukraine in early 2022, which led to boiled oil prices to more than $100 per barrel mark in that year. Time shift, while the Russia and Ukraine war continues, the heartland of crude oil production globally has been threatened by conflict in the Middle East in recent times. But unlike 2022, crude oil prices have rather lost a lot of steam and averaged above $80 a barrel in 2023, and further lower at the onset of 2024. Will this mean, in India, fuel prices such as petrol, diesel and CNG will go down as well?

In 2023, benchmarks Brent crude and US WTI touched a 52-week high of $97.69 per barrel and $95.03 per barrel on September 28th. However, prices have tumbled to $77.04 a barrel in Brent, and $71.65 a barrel in WTI by the end of this year.

The start of 2024 has been dull as well with Brent crude ranging between $75.89 to $79 per barrel levels, before ending at $78.76 per barrel on January 5th. And US WTI performing between $70.38 to $74.24 a barrel before ending at $73.81 a barrel on Friday.

This will be a nosedive of 43-44% in crude oil prices from their record levels of March 2022 which was an outcome of the Russia-Ukraine war. Brent touched a new high of $139.13 per barrel and a US WTI high of $130.50 per barrel on March 7, 2022, as the war fuelled by the Kremlin heightened.

If gone by the pattern, crude oil prices should have shot up after October 7th when Hamas invaded Israel which led to a full-blown war between the two. The Middle East which includes some of the major oil producers of OPEC+ such as Iraq, Iran, Kuwait, Saudi Arabia, and Bahrain among others, is currently on hot bed with Israel's ground extermination of Hamas members in Gaza, and airstrikes exchange in Northern region.

The current Israel-Hamas war was expected to hit the crude supply chain. Not only that oil prices had the potential to blow up after concerns have escalated over the trade and shipping in the Red Sea and the Bab el-Mandeb Strait after continuous and rebellious attacks from Iran-backed and Yemen-based Houthi rebels.

There was a brief moment when crude oil prices did scale up when Israel declared war on Hamas, however, the enthusiasm dulled eventually. The prices even lacked upside on OPEC+ production cuts. As per U.S. Energy Information Administration estimates, Brent Crude averaged $82.40 per barrel by the end of 2023, compared to the average of $100.94 per barrel in 2022, while at the start of 2024, the average price is currently around $82.57 per barrel.

EIA forecast the Brent crude oil spot price to increase from an average of $78 per barrel (b) in December to an average of $84/b in the first half of 2024, partly driven by recently announced OPEC+ production cuts. Despite the announced cuts, however, EIA has lowered our forecast for the Brent price in 2024. On its website, it said, "We expect the Brent spot price will average $83/b next year, down from our forecast of $93/b in last month's STEO."

This could come as good news for Indian vehicle users as lower crude oil prices usually lead to a drop in prices of petrol and diesel. But is there any chance for that to happen anytime soon?

To derive fuel prices in India, the formula takes into consideration crude oil price (Brent crude), along with processing costs (such as freight, refining processing, refinery margins, OMC margin, logistics, and operation costs), and a buffer for future inflationary prospects. Apart from this, there is a host of taxes and duties that have an impact on fuel prices such as excise duty and road cess which are imposed by the central government, coupled with commissions from petrol pump dealers, and lastly, VAT which is charged by respective states.

Explaining the latest crude oil prices impact and their lacklustre effect on Indian fuel prices, Amit Goel, Co-Founder and Chief Global Strategist at Pace 360 said, "Refining costs, up in 2023, hindered the immediate pass-on of reduced oil prices to consumers. Stable or increased refining expenses might counterbalance anticipated savings from falling crude oil prices."

He added, "Government taxes significantly affect fuel prices, constituting a substantial part of overall costs. Unchanged or increased tax rates on fuel can limit consumers from benefiting fully from lower global crude oil prices. Additionally, persistent high demand despite declining oil prices might deter significant price reductions at retail outlets."

In India, Goel further said that state-owned oil firms face financial constraints due to losses incurred in 2022 when retail oil prices lagged behind actual prices. The need to recover these losses might delay or moderate fuel price reductions despite the decline in global oil prices.

During peak periods, as per Goel, oil marketing companies (OMCs) faced losses of Rs 17.4 per litre on petrol and Rs 27.7 per litre on diesel. Although there was a margin of Rs 10 per litre on petrol in October-December 2022, diesel still incurred a loss of Rs 6.5 per litre. In the subsequent quarter, the margin on petrol was reduced to Rs 6.8 per litre, while diesel saw an improvement, earning a margin of Rs 0.5 per litre.

OMCs earnings are likely to be under pressure in Q3 of FY24.

In its latest research report, Emkay Global highlighted that diesel marketing margins fell to negative ~Rs0.5/ltr, while petrol margins improved 20% to Rs6.8/ltr in Q3FY24. LPG margins also turned negative, at ~Rs60/cyl.

Meanwhile, Emkay's data showed that Brent averaged at $84/bbl in Q3FY24, down 3% QoQ, closing $19/bbl lower at $78/bbl between the two quarter ends, thereby resulting in refining inventory losses of $2.5-3/bbl for OMCs. Benchmark GRMs also slumped, to $5-6/bbl from $9-10/bbl QoQ, due to a correction in distillate spreads. Russian crude discounts shrank, while Middle-East OSPs were slightly higher.

Accordingly, Emkay's note said, "We expect OMCs to record 70-80% decline in EBITDA QoQ. Q3FY24E PAT for IOCL is estimated at Rs26bn, while BPCL/HPCL would see PAT of Rs6/2bn, respectively."