New Delhi: Brent crude crossed $100 a barrel for the first time in six weeks as the escalating war in West Asia raised the prospect of tighter supplies, threatening to widen India’s oil import bill and add to inflationary and fiscal pressures.
Brent rose as much as 2.8% to $100.70 a barrel on Wednesday, while West Texas Intermediate climbed 2.92% to $95.75. Brent had last crossed the $100 mark on July 24.
The surge comes as the conflict between the US and Iran escalates. The US military said Wednesday that it had destroyed five Iranian tankers, while Iran responded with attacks on US ships and a US military base in Jordan. A spokesperson for Iran’s Islamic Revolutionary Guard Corps said that a restricted area extending from Chabahar in Iran into parts of the Gulf of Oman and the Arabian Sea will be announced and any ship that passes through the area will be sanctioned.
India, which imports about 90% of its oil needs, is particularly vulnerable to a prolonged rise in prices. A sustained $1 increase in crude prices can add about ₹18,000 crore to the country’s annual import bill, according to industry estimates by Bank of Baroda. India’s annual oil import bill of about $120 billion accounts for roughly 17% to 25% of total merchandise imports.
The pressure was building even before the latest spike. India’s crude oil import bill for April-July reached $63.37 billion, up 56% from a year earlier, and already accounts for more than half of the total oil import bill for the previous fiscal year.
Crude basket
The Indian basket of crude, which reflects the mix of Brent, Oman and Dubai grades bought by Indian refiners, rose to $108.91 a barrel on Tuesday. Its average price for September so far is $102.11, compared with $90.19 in August.
“With escalation in hostilities between Iran and the US, Brent prices have crossed the $100/barrel mark today and the Indian crude basket is at $109/barrel,” Vasisht said.
If the geopolitical situation persists, prices could rise further as countries including China tap strategic reserves, potentially adding to demand when supplies are already constrained, said Prashant Vasisht, senior vice president and co-group head, Corporate Ratings.
Higher crude prices would put pressure on fuel retailers to either absorb rising costs or raise pump prices, while also increasing the government’s exposure through fuel and cooking-gas subsidies. A prolonged increase could therefore feed into inflation, weaken the current account and put pressure on the rupee.
“Geopolitical risk premium is back into the market with diminishing prospects for an immediate diplomatic resolution,” said N.S. Ramaswamy, head of commodities at online trading platform Ventura Securities. A return to triple-digit crude prices threatens vulnerable economies through higher import bills, wider current-account deficits, currency pressure and increased fiscal strains, he said.
The developments also come as global markets grapple with the prospect of higher energy costs weighing on economic growth. For India, the immediate concern is how long crude remains above $100 and whether and the government pass the higher costs through to consumers.
The impact is already being felt by fuel retailers. At the average Indian crude basket price so far in September, marketing margins for oil companies on petrol are negative ₹5 a litre and on diesel negative ₹23 a litre, while under-recoveries on domestic LPG have reached about ₹200 a cylinder, Vasisht said.