The problem:

Global oil demand has picked up to levels seen before the pandemic, which
producers are struggling to meet. And with members of the oil cartel OPEC+
routinely falling short of their rising monthly production target, one cannot afford
any more disruptions to the world's oil supply.
Middle East angle: 
Middle East angle:Key oil-producing countries have also not really
increased crude oil supplies despite rising demand. OPEC+had agreed to
sharp cuts in supply in 2020 owing to Covid-induced travel restrictions,but
the organisation has been slow to boost production since.The alliance has
come under increasing pressure from oil-consuming countries to to boost
supply,as demand has proved stronger than expected but the cartel's
supply lagged behind its targets by 900,000 barrelsaday in
January,againstashortfall of 790,000 barrelsaday in December.

Why the prices are high?

" Russia is the largest non-open supplier of crude and gas to the world. Any war
can possibly mean Russians declare "force majeure" on their oil contracts with
their buyer clients. Insurance costs are likely to go up on tankers, pushing prices
higher," said Vijay Bhambwani, Head of Research,Behavioural Technical
Analysis at Equitymaster.
The fallout: Russia exports about 5 million barrels a day of crude. About 60% of
Russia’s oil exports go to Europe, and another 30% go to China.Russia is not only
one of the world's largest oil producers 

Other reasons for rising oil prices

These include consumption being strong despite the spread of the Omicron
variant of the coronavirus. Add to that more supply constraints like drone
attacks on oil facilities in UAE, a major oil producer, outage on a major oil
pipeline linking Saudi Arabia and Turkey as well as spare capacity dwindling
with insufficient investment in new production.

If prices increase globally to beyond $100 a barrel, Indians need to brace for a
huge spike in petrol and diesel prices in March, after the state polls as India
imports more than 80 per cent of the oil requirement. Data from Crisil Research
shows that YTD import of oil (in USD) bill data (April-December 2021) is
higher by 109% given nearly 85% increase in oil prices to $72.8 per barrel
between April – Dec 2021, compared with $39.3 per barrel between April-
December 2020.

" The rise in the price of crude has a direct impact on Indian fuel prices because
India imports 85% of crude oil requirements. Currently India is holding election
in 5 states and that is the reason why prices are not increasing but once it is over
we may see a big increase in the fuel prices The rise in fuel prices will also
having a direct impact on inflation as transportation cost increases the prices
across all daily needs," said Kshitij Puruhit, Lead commodities and currency
expert at CapitalVia Global Research.

When oil price rises, so does inflation, as one has to shell out more for fuel.
Major global central banks like US Federal Reserve and Bank of England have
already begun tightening their monetary policies and the Reserve Bank of India
is also expected to raise rates in the current year. According to a report by Bank
of Baroda, a 10 per cent increase in crude oil will lead to an increase in the
Wholesale Price Index (WPI) in India by nearly 0.9 per cent. The report predicts
that increasing oil price may even result in a rate of inflation based on WPI at
12 per cent and 6 per cent for FY22 and FY23, respectively
Once the polling is over, we can see the fuel prices moving up because in the
past also state level elections have resulted in a freeze on the retail prices but as
soon as the polling is over, prices start getting revised and retail prices starts
adjusting to the international prices," Dr Sunil Kumar Sinha, Principal
Economist & Director Public Finance, India Ratings & Research told Economic
Times in an interview.

So, when will diesel and petrol prices rise?

"In terms of prices of petrol and diesel, despite increase in oil prices, petrol and
diesel prices have remained stable since December 2021 given the lowering of
taxes. In fiscal 2022, petrol and diesel prices are estimated to be higher by 18-
20% on-year, given an increase in oil prices. Retail price increase remains a
monitorable as crude oil prices are also projected to decline from current highs
of over $90 per barrel from second quarter of the calender year assuming
lowering of geopolitical risk," said Hetal Gandhi, Director, CRISIL Research.
" Crude prices could spike up to $100 a barrel, triggering inflation in India and
worsening global inflation. Moreover, this price rise could lead to steeper rate
hikes in the US, which might trouble emerging markets like India. Also, the
Indian budget has assumed an oil price of $65 in its budget projection, and if oil
prices rise, there will be a need for government subsidies," said Sonam
Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor.

A surge in crude oil prices could also increase India’s expenditure, which will
adversely affecting India’s fiscal deficit - the difference between the
government’s total revenue and total expenditure. Fiscal deficit indicates the
amount of money the government has to borrow to meet its expenses. A rise in
fiscal deficit could negatively affect the economy as well as markets.
The rise in crude oil prices will cause the rupee to depreciate further. "The rupee
is expected to depreciate further today, due to rising crude oil prices and
stronger dollar. Additionally, risk aversion in the global markets may strengthen
the dollar further.” said ICICI Direct in its report.

ATF prices rise: Jet fuel rose to record levels across the country at the beginning
of February following a steep 8.5 per cent hike necessitated due to a spike in
international oil prices.ATF price was hiked by Rs 6,743.25 per kilolitre or 8.5
per cent to Rs 86,038.16 per kl in the national capital, according to a price
notification of state-owned fuel retailers. So, any further hike in international
crude means high fuel prices will become a bigger concern for airlines amidst
pandemic-induced weak demand

What is the price impact of increased taxes on fuels?

Elevated tax levels are also playing a major role in the current record high prices in India.
The central government had last year increased levies on petrol by Rs 13 per litre and on
diesel by Rs 16 per litre to shore up revenues as the pandemic forced a sharp slowdown in the
economic activity. Central and state taxes currently account for about 53.5 per cent of the
pump price of petrol and about 47.6 per cent of the pump price of diesel in Delhi.

The rising crude oil prices, and the higher taxation impact, have contributed to the prices of
petrol and diesel regularly setting new record highs across the country in 2021. The price of
petrol in the national capital is Rs 106.9 per litre up Rs 5.7 per litre in the past month while
the price of diesel is at Rs 95.6 per litre up Rs 7 per litre over the same period.
India has seen a faster recovery in the consumption of petrol than of diesel after pandemic-
related restrictions with petrol consumption up 9 per cent in September compared to the year
ago period but diesel consumption remaining 6.5 per cent below 2020 levels. Diesel accounts
for about 38 per cent of petroleum product consumption in India and is a key fuel used in
industry and agriculture.

Experts have noted that countries like India do not have much bargaining power in the
current market scenario where supply is lower than demand and that India’s bargaining
power may be reduced further if we try to further diversify crude oil procurement. Also, the
level of output and pricing benchmarks are decided by cartels such as OPEC.
In March, then petroleum minister Dharmendra Pradhan had said that India would source
crude from whichever country gives India the best price and business terms. India had moved
to lower crude oil procurement from middle eastern countries in favour of procurement from
Latin American and African nations after Saudi Arabia and other OPEC nations did not raise
their crude oil production schedule despite rising crude oil prices.

EDIBLE PRICES-
Edible oil prices are likely to witness a double-digit rise in the next few months compared to January this year, following
geopolitical tensions and Indonesia's decision to ban crude palm oil exports, according to a report. India Ratings and
Research (Ind-Ra) said Indonesia's decision on April 27 to include Crude Palm Oil (CPO) in the scope of its export ban
starting April 28 is likely to affect both supply and prices of edible oils globally.

India's monthly consumption of sunflower oil before the outbreak of the Russia-Ukraine war was 200,000 tonnes, which
declined by half as supplies from the Black Sea region came to a standstill.

"Now that the war is stabilising, sunflower oil supplies from Ukraine are gradually picking up by small barges, railways and
by road. We expect India's sunflower oil supplies to increase by another 20,000 tonnes to 25,000 tonnes per month," said
Bajoria.

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