A sharp hike in fuel prices is likely as elections come to a close

• WTI Crude has risen by 33% this year to the above $60/barrel mark while Brent has risen by 30% to just under $70/barrel.
  
• However, despite the consistent rise in global crude prices this year, fuel prices in Indian cities have flatlined since early March 2019.
  
• In a bid to keep voters happy, the government told state-owned oil marketing companies (OMC) to keep prices stable in April and May as voting got underway.
  
• However, after the elections, fuel prices will likely increase at a higher rate than expected, as OMCs try and make up for the losses they have absorbed in the last few months.
  

Rising oil prices proved to be a huge problem or India last year, leading to a rise in its trade deficit, higher inflation and a depreciation of the rupee.

However, as oil prices petered off towards the end of 2018, the Indian economy was given a respite.

As 2019 has progressed, oil prices have been on the rise again owing to a curtailment in production by OPEC countries like Saudi Arabia and lesser exports from sanction-hit Iran and Venezuela.

In fact, WTI Crude has risen by 33% this year to the above $60/barrel mark while Brent has risen by 30% to just under $70/barrel. While this has been offset by a rise in US shale production, prices in the second half of the year will be subject to global economic growth, which, fortunately or not, is set to slow.

Under India’s current deregulated system, which involves the daily revision of rates, state-owned fuel retailers fix rates based on international benchmarks like a 15-day average of global prices.

In comparison, OMCs raised domestic fuel prices by 10% between August and October last year - which was more in alignment with global price movements.


This is, of course, an election ploy.

In a bid to keep voters happy, the government told state-owned oil marketing companies (OMC) - which include the likes of Indian Oil, Bharat Petroleum and Hindustan Petroleum - to keep prices stable in April and May as voting got underway.

The real pain will come after the elections. As India’s oil import dependence is increasing, from 80% to 84%, global price movements will be harder to contain on a domestic level. A single-party government will be more trigger-happy when it comes to allowing price hikes in domestic fuel.

Either way, fuel prices will likely increase at a higher rate than expected, especially as state-owned oil market companies try and make up for the losses they have absorbed in the last few months.

This was seen in the case of the Karnataka state elections in May last year, when petrol and diesel prices were hiked considerably after being unchanged in the weeks running up to voting.

This will also be exacerbated by the Trump administration’s removal of waivers to purchase oil from Iran. Higher oil prices means a higher import bill for India, a higher fiscal deficit and a continued fall in rupee and difficulties in the aviation sector. This will likely drive inflation upwards, stalling the RBI’s plans of another possible rate cut.


SEE ALSO:
You won't have to worry about petrol and diesel prices for next two months

India could be in for a very crude shock as the US revokes waivers to purchase oil from Iran