OPEC Plus Group’s Decision May Not Tame Inflation: Care Ratings

The decision to increase crude oil production was taken at the 19th Ministerial OPEC & non-OPEC meeting

OPEC Plus Group’s Decision May Not Tame Inflation: Care Ratings
OPEC Plus Group’s Decision May Not Tame Inflation: Care Ratings
OLM Desk - 19 July 2021

OPEC Plus group's decision to increase crude oil output by 400,000 barrels per day (bpd) from August will not benefit India as inflation may not ease, said consultancy firm Care Ratings in a recent statement.

Care, however, admitted that higher crude production could check the current retail price rise in the domestic market.

The decision was taken by the members of OPEC and non-OPEC countries at the 19th Ministerial meeting to help lower crude oil prices. The meeting involved 23 producing countries accounting for 40 per cent of total output. This decision, however, will lead to 2 million barrels of additional crude oil production and a meagre 2 per cent increase in supply by December.

“Brent was expected to cross $80/bbl (barrel) soon with a stalemate on production quotas. However, Brent closed at $73 on Friday, and this should help to lower the price over time. However, analysts were not ruling out $100/bbl, which probably looks unlikely,” said Care in its statement.

The same group of producing countries had invoked a 10 million bpd production cut last year on account of the pandemic, which had driven prices to low levels. Subsequently, they agreed on lowering this cut to 5.8 mn bpd. However, some members wanted higher quotas as their economies run on oil, and production cuts affect growth prospects. UAE, in particular, wanted higher quotas which led to the impasse.

With the present negotiations, there will be an increase in quotas for UAE from 3.1 to 3.5 million bpd, while for Saudi Arabia, it will increase from 11 to 11.5 million bpd. However, the International Energy Agency (IEA) estimates that there will be a shortfall of 1.5 mn bpd in the second half of the year even after these increases are invoked.

What does this mean for India?

According to the rating firm, this is good news for India because there seems to be a ‘no solution’ with the centre unwilling to lower taxes as consumers pay higher prices for petrol and diesel. This is even as higher transport costs have pushed up the prices of all goods. As a result, Consumer Price Index (CPI) inflation is above 6 per cent, while Wholesale Price Index (WPI) is above 11-12 per cent. The situation is expected to remain grim as long as fuel prices are high.

With global crude prices likely to retreat, there could be a reversal of prices in the domestic market. However, Care is of the view that this would not be significant.

The table below indicates the impact of crude prices on petrol prices in Delhi based on different scenarios.

Petrol pricing in Delhi: alternative scenarios

Brent $/bbl

Cost in Rs/litre

Cost of petrol Rs/litre

Excise

Commission

VAT 30%

MRP

75

35.38

41.41

32.9

3.85

23.45

101.61

74

34.91

40.86

32.9

3.85

23.28

100.89

73

34.43

40.31

32.9

3.85

23.12

100.17

72

33.96

39.75

32.9

3.85

22.95

99.45

71

33.49

39.20

32.9

3.85

22.79

98.74

70

33.02

38.65

32.9

3.85

22.62

98.02

Source: Care Ratings

The table gives specific scenarios with assumptions on the movement of Brent from $75 to $70 with an exchange rate of Rs 75/$. It assumes excise and VAT remain unchanged.

The calculation indicates that Brent prices are to come down by $5 a barrel if petrol prices reduce by around Rs 3.58/litre.

“The impact of the output increase by OPEC+ on crude price will be only gradual,” said Care.

The final relief on petrol price with ceteris paribus conditions would be 3.5 per cent for a 6.7 per cent decline in Brent.

“Quite clearly, the government has to give in somewhere if we want to reduce prices significantly to have an impact on the prices and overall inflation,” the rating firm said in the statement.

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