OPEC+ Output Cut: Deeper OPEC+ output cut could hit fuel retailers, stoke inflation fears
NEW DELHI: The OPEC+ grouping’s decision on Thursday to cut production further could end up resuming pressure on the profitability of state-run fuel retailers, delay possible cuts in interest rates and test the government’s inflation management in the run-up to the general elections next year.
At a virtual meeting, the grouping’s members, including Russia, decided to pare output by a million barrels per day (bpd), taking the total reduction in the grouping’s output since late 2022 to over 6 million barrels a day, or over 6% of the global demand.Simultaneously, Saudi Arabia, the grouping’s de-facto leader, also decided to roll over into 2024 its one million bpd voluntary production cut.
OPEC+ had already pledged total output cut of 5 million barrels per day in a series of steps since late 2022. These included 3.6 million bpd by OPEC+ and additional voluntary cuts by Saudi Arabia and Russia.
But still, the latest manoeuvre did not set the market on fire. Reuters reported benchmark Brent rising to $84 per barrel for January, while quotes for February were down $1 at $81.85 till the time of going to the press.
Oil prices had shed their inertia seen in the first half, during which they slid to $79 a barrel, to hit 2023 high of nearly $98 in September. The latest Opec+ move is expected to keep the pot boiling.
However, motorists need not worry. The government is unlikely to allow state-run fuel retailers, which dominate 90% of the market, to raise pump prices as it heads for the Lok Sabha polls early next year.
Raising fuel prices at this juncture will stoke inflation when it is showing signs of easing and give the Opposition an opportunity to target the ruling party in the polls.
With hefty first half profits in their kitty due to low oil prices, the Centre is sure to call in the support of state-run fuel retailers, which can turn petrol and diesel sales unprofitable once again if oil rises further.
Falling oil prices in the first half had made petrol and diesel sales profitable at current rates that remain frozen since May 2022. As a result, the three big state-run fuel retailers — IndianOil, HPCL and BPCL — posted record profits in spite of the frozen pump rates.
Stagnant pump prices amid elevated oil prices in 2022-23 had resulted in a combined loss of Rs 21,000 crore for the companies as under-recovery on petrol and diesel had hit Rs 12-14 at one point.
The impact of any flare-up in oil prices on the economy will, however, be different as India depends on imports to meet 80% of oil requirements. Costlier crude squeezes the government’s leg room for social welfare spending by inflating the import bill, which weakens the rupee by impacting the current account deficit (CAD).
Higher oil prices will prolong inflationary fears and prompt the RBI to continue with its pause on interest rates for longer, dashing hopes of cheaper EMIs.
Every $10 increase in Brent crude price widens CAD by 0.5% and leads to imported inflation as a weaker rupee makes imports costlier, leaving less money to spend.
The OPEC+ decision comes at a time when price pressures were easing slightly although it still remains above the Reserve Bank of India’s comfort level.
At a virtual meeting, the grouping’s members, including Russia, decided to pare output by a million barrels per day (bpd), taking the total reduction in the grouping’s output since late 2022 to over 6 million barrels a day, or over 6% of the global demand.Simultaneously, Saudi Arabia, the grouping’s de-facto leader, also decided to roll over into 2024 its one million bpd voluntary production cut.
OPEC+ had already pledged total output cut of 5 million barrels per day in a series of steps since late 2022. These included 3.6 million bpd by OPEC+ and additional voluntary cuts by Saudi Arabia and Russia.
But still, the latest manoeuvre did not set the market on fire. Reuters reported benchmark Brent rising to $84 per barrel for January, while quotes for February were down $1 at $81.85 till the time of going to the press.
Oil prices had shed their inertia seen in the first half, during which they slid to $79 a barrel, to hit 2023 high of nearly $98 in September. The latest Opec+ move is expected to keep the pot boiling.
However, motorists need not worry. The government is unlikely to allow state-run fuel retailers, which dominate 90% of the market, to raise pump prices as it heads for the Lok Sabha polls early next year.
Raising fuel prices at this juncture will stoke inflation when it is showing signs of easing and give the Opposition an opportunity to target the ruling party in the polls.
With hefty first half profits in their kitty due to low oil prices, the Centre is sure to call in the support of state-run fuel retailers, which can turn petrol and diesel sales unprofitable once again if oil rises further.
Falling oil prices in the first half had made petrol and diesel sales profitable at current rates that remain frozen since May 2022. As a result, the three big state-run fuel retailers — IndianOil, HPCL and BPCL — posted record profits in spite of the frozen pump rates.
Stagnant pump prices amid elevated oil prices in 2022-23 had resulted in a combined loss of Rs 21,000 crore for the companies as under-recovery on petrol and diesel had hit Rs 12-14 at one point.
The impact of any flare-up in oil prices on the economy will, however, be different as India depends on imports to meet 80% of oil requirements. Costlier crude squeezes the government’s leg room for social welfare spending by inflating the import bill, which weakens the rupee by impacting the current account deficit (CAD).
Higher oil prices will prolong inflationary fears and prompt the RBI to continue with its pause on interest rates for longer, dashing hopes of cheaper EMIs.
Every $10 increase in Brent crude price widens CAD by 0.5% and leads to imported inflation as a weaker rupee makes imports costlier, leaving less money to spend.
The OPEC+ decision comes at a time when price pressures were easing slightly although it still remains above the Reserve Bank of India’s comfort level.