New Delhi: Saudi Arabia's announcement to reduce how much crude oil it sends to the global economy may arrest the fall in international oil prices, delaying revision in fuel prices in India, industry sources said. Saudi Arabia on Sunday announced cuts of 1 million barrels per day in oil output starting July, while the rest of the OPEC+ producers agreed to extend earlier cuts in supply through the end of 2024.
The decision led to oil prices rising by more than USD 1 a barrel on Monday. Brent crude futures were at USD 77.64 a barrel, up USD 1.51, or 2 percent, in early morning trade after hitting a session-high of USD 78.73 a barrel. US West Texas Intermediate crude climbed USD 1.41, or 2 percent, to USD 73.15 a barrel, after touching an intraday high of USD 75.06 a barrel.
This spurt will reverse the softening in rates witnessed in the basket of crude oil that India imports. The Indian basket was hovering around USD 72 per barrel in the last few days and had brightened prospects of a cut in petrol and diesel prices.
"Public sector oil companies had been recouping losses they incurred for holding rates when crude oil prices shot through the roof. Last month, international oil prices and retail pump rates had come at par. But now with the prices rising, the difference between cost and retail prices will reappear," an industry official said. India imports 85 percent of its oil needs and its fuel pricing is indexed to international rates.
Petrol and diesel prices have been on a freeze for a record 14 months now. Petrol costs Rs 96.72 per litre in the national capital and diesel comes for Rs 89.62 a litre. State-owned fuel retailers are supposed to revise petrol and diesel prices daily based on a 15-day rolling average of benchmark international fuel prices but they haven't done that since April 6, 2022.
Prices were last changed on May 22, when the government cut excise duty to give relief to consumers from a spike in retail rates that followed a surge in international oil prices.
Jim Burkhard, Vice President and Head of Research for Oil Markets, Energy and Mobility, S&P Global Commodity Insights, said, "Much will depend on how the market reacts to this reduction in light of demand and supply expectations, and market sentiment about wider issues, including the trend of the world economy, interest rates, and geopolitical events."
S&P Global Commodity Insights estimates the cut will lower Saudi Arabia's crude oil production from 9.9 million barrels per day in June to 8.9 million bpd in July. "The latest Saudi cut is unilateral whereas the one announced before this in April was in coordination with several countries. Before that, in 2021, Saudi Arabia did cut on a unilateral basis as it has done on occasion in the past."
The oil market faces headwinds from an uneven re-opening of China's economy, US banking problems, high-interest rates, and strong oil production growth outside of OPEC+ including from the United States, Canada, Brazil, Norway and Guyana.
"In terms of world oil demand and supply fundamentals, the cut will likely expand a previously expected supply deficit in the third quarter of this year. Prices have been weak lately and the impact of this cut remains to be seen," Burkhard said.