"Consequently, the risk of an eventual correction has risen. If the risk materialises, the spillover effect may be felt globally as well. Amidst these concerns, low oil prices are a bright spot for the economy," said the government review.
Oil prices dropped on Thursday, reversing earlier gains, as news of top exporter Saudi Arabia giving up its crude oil price target in preparation for expanded production weighed on the market.
Brent crude futures were down 55 cents, or 0.75%, to USD 72.91 a barrel, while U.S. West Texas Intermediate crude fell 55 cents, or 0.79%, to USD 69.14 per barrel as of 0502 GMT.
A reduction in crude oil prices in recent weeks has improved margins on retail auto fuels, providing state-owned firms a headroom to cut petrol and diesel prices by INR 2-3 per litre, rating agency Icra said on Thursday. The price of a basket of crude oil India imports averaged USD 74 per barrel in September, down from about USD 83-84 a barrel in March when petrol and diesel prices were last cut by INR 2 per litre.
Big savings for India:
With India needing to import 80% of its oil needs, a report by BofA Securities showed that a 20% drop in crude prices could result in annual savings of approximately USD 13 billion for every USD 10/barrel decrease. This would further strengthen the country's external finances, as the Reserve Bank of India (RBI) has already added USD 67 billion in foreign reserves in 2024 alone.
Brent crude prices, which recently dropped to USD 70/barrel — the lowest since December 2021 — remain below USD 75/barrel, marking a 20% decrease from the April peak of USD 92/barrel. The report also noted that increased imports of discounted Russian crude have contributed to reduced energy costs for India.
Softening of crude oil prices:
Crude prices have witnessed a sharp decline in the last few months, primarily due to weak global economic growth and high US production and the OPEC+ has pushed the rollback of its production cuts by two months to combat the declining prices.
A decline in the price of crude oil -- which is converted into fuels like petrol and diesel at refineries -- had rekindled hopes for a reduction in petrol and diesel rates that have been on a freeze for over two years now barring a pre-election reduction in March.
While petrol and diesel pricing is deregulated (meaning oil companies have the freedom to fix retail rates), the state-owned fuel retailers, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), have rarely used this freedom since late 2021 by not revising prices in line with cost.
To be sure, crude oil prices remain vulnerable to various risks such as production cuts, political instability in certain regions, or escalations in geopolitical tensions. Significant fluctuations in fuel prices can cause disruptions, and analysts believe the government may adopt a wait-and-see approach for the coming months.
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