Once again, conflict in the Middle East has shaken global oil markets, and its impact is being felt far beyond the region. As tensions rise, crude oil prices rise and so do pressures in India.
The government now faces a difficult choice: protect consumers from rising fuel prices or help state-run oil companies that are struggling with mounting losses.Crude oil prices rose above $126 a barrel on Thursday after US President Donald Trump signaled that the naval blockade of Iran would continue, raising concerns about ongoing disruption in the Strait of Hormuz and exacerbating global supply pressures.
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Fuel prices may rise soon as oil companies face losses amid rising global crude oil prices
This rise has led to a significant increase in losses for state-owned oil marketing companies, which are already under pressure due to the impact of the Gulf War on energy markets.
According to people familiar with the matter cited by ET, these companies are seeking immediate permission to raise pump prices and pass on higher global costs to consumers. Their losses are increasing in gasoline, diesel, aviation turbine fuel (ATF) and liquefied petroleum gas.However, the government is not expected to agree to raise interest rates immediately, despite the financial pressure on asset management companies. One person said the delay was partly due to speculation linking the freeze in fuel prices to the recently concluded elections.
“Global prices have been volatile and have risen sharply, but the government’s efforts have been to ensure that consumers face the least problem and that is why our prices are stable,” Sujata Sharma, Joint Secretary, Ministry of Petroleum and Natural Gas, said on Thursday. “The impact on (oil marketing companies) will be known over time.”Sharma also denied reports of an increase in fuel prices from May 1 earlier this week.The current situation may not be sustainable for long, and open market companies are likely to eventually seek compensation from the government if retail prices remain unchanged, people familiar with the ongoing discussions said.
Consumer relief and OMC pressure
The Center is already dealing with expanding subsidy commitments on LPG and fertilisers, making it reluctant to absorb further shortfall in petrol and diesel recovery due to the potential impact on the government’s finances.Allowing fuel prices to rise would improve the balance sheets of international oil companies, but such a move carries the risk of pushing inflation higher and putting pressure on economic growth.The scale of the global energy shock was severe. Compared to February levels, average diesel prices in April rose 119%, gasoline increased 69%, LPG rose more than 40%, and ATF prices doubled. The price of Brent crude, which was around $73 per barrel before the war began on February 28, has now risen significantly.
June Brent crude futures topped $126 before expiring on Thursday, while July futures traded near $114.This represents one of the rare occasions when the monthly average of Brent crude oil exceeded $120 per barrel, a level that has only been seen six times before, including in the run-up to the 2008 global financial crisis and after the outbreak of the Ukraine war in June 2022.Domestically, oil companies have so far avoided large-scale fuel price hikes by selectively adjusting prices.
Premium petrol, bulk diesel and international aviation ATF were increased sharply in line with global prices. However, regular petrol and diesel prices at filling stations remained frozen, the local ATF saw only partial increases, and LPG prices rose by just Rs 50 per cylinder.In the early phase of the war-induced price rise, there was an expectation that crude oil companies would be able to manage losses using profits accumulated over the previous years from lower crude oil prices and higher retail margins. But with the Gulf crisis showing no signs of ending soon, these reserves are shrinking, and discussions are increasingly turning towards the possibility that higher fuel prices will become inevitable.