Oil slips on profit-taking from Iran-based rally

Crude oil prices slipped on Thursday, giving up early gains as investors took profit on a rally triggered by potential disruption to oil flows from major exporter Iran in the face of US sanctions. Brentcrude futures fell 8 cents to $77.13abarrel, having risen earlier in the day to$78, the highest since November2014. Oil prices were on track for their fourth consecutive quarterly gain, the longest such stretch for more than 10 years. Oil prices may upset trade, fiscal balance

The last year of the current National Democratic Alliance government (2018-19) could be very similar to its first year (2014-15) in terms of its ability to manage India’s current account and to earn substantial revenue from retail sale of petroleum products, if current oil prices are taken as representative for the year.

Crude oil price for Indian basket touched $75 per barrel on May 9 after 41 months — last such instance was in the first week of December 2014— as Brent crude prices rose 6 per cent in the first 10 days of the month from $73 to $77.7 per barrel. Adding to this the depreciation in Indian rupee, the landed price of a barrel of oil was ~5,050 per barrel on May 9.

Thus, input cost of oil for refineries has jumped 40 per cent, compared to six months ago, while it is about 20 per cent more than the assumption made in the Budget. In October 2017, oil was fetched at ~3,636 per barrel, while the government has assumed ~4,225 per barrel for the year.

The government has made two assumptions: oil (Indian basket) would average $65 per barrel, and rupee would average at ~65 a dollar over the year. On this basis, it has estimated the crude oil import bill to be $105 billion in 2018-19, 20 per cent higher than that in 2017-18. With rupee trading at ~67.4 per dollar (May 9), both assumptions have been breached by a considerable degree in May, which does not augur well for the Centre’s budgeted plan, and the import bill could possibly go above expected $105 billion. Value of crude oil import was $113 billion in 2013-14. In addition to contribute heavily to the widening current account deficit, this price rally in the last year of the current government would wipe off the windfall gain made in the three middle years.

Oil marketing companies and sources from the government, however, are keeping a wait-and-watch stance. M K Surana, chairman and managing director of Hindustan Petroleum Corporation has termed this rally as a temporary phenomenon. “There is no fundamental reason for the current price rise in the international market. The short-term spike due to Iran sanctions has not been supported by the European Union or the United Nations,” Surana told BusinessStandard.

When oil prices were in the $50-$60 range, current account deficit (CAD) for the first three quarters of 2017-18 stands at 1.9 per cent of gross domestic product. This is worse than 1.7 per cent in the last year of the United Progressive Alliance government. Rising oil prices would put further pressure on CAD in 2018-19.