If the Organisation of the Petroleum Exporting Countries (OPEC) and its allies are going to cut down production, petrol and diesel prices in the country may rise in the coming weeks and months, after remaining stagnant for months. India, the third largest oil importer, is dependent on OPEC and allies for over 70% of its crude requirements.

OPEC Plus – a grouping of 23 oil-rich countries led by Saudi Arabia, Middle East countries, African and their 10 allies like Russia which together control nearly 40 percent of the world's oil supply -- are meeting in Vienna on Wednesday to discuss a major production cut for the first time since March 2020. India had strategically increased cheap oil supplies from Russia, now the second largest import destination after Saudi Arabia. Before the Ukraine war, India was buying only 1% of its crude requirement from Russia, but in the last month it increased to over 20%, say reports.

The OPEC meeting is expected to announce a production cut to the tune of about 1 million barrels per day (mbpd), following falling oil prices since June, mainly due to less demand in China, rising interest rates, surging U.S. dollar and fears of an impending global slow down. Index Brent crude prices had risen from a low of $20.4 per barrel in April 2020 to peak at $123 per barrel by March this year, but then steadily fell to $84 by September 26, 2022. Following news on possible production cuts by OPEC, prices have already started rising to nearly $90 per barrel.

In India, petrol and diesel prices have remained unchanged since May 21, 2022, when finance minister Nirmala Sitaraman announced an excise duty cut of ₹8 per litre on petrol and ₹6 per litre on diesel. Then, many states like Maharashtra, Rajasthan and Kerala also effected reduction in value added tax (VAT) to reduce petrol and diesel prices to tame inflation, as the fuel prices had soared to ₹105.41 a litre for petrol and ₹96.67 a litre for diesel in Delhi and ₹120.51 and ₹104.77 per litre, respectively, in Mumbai on May 20, 2022.

Oil marketing companies like Indian Oil (IOC), Hindustan Petroleum Corporation (HPC) and Bharat Petroleum Corporation (BPCL) were losing ₹14-18 a litre on petrol and ₹20-25 per litre on diesel after the government effected a deep cut in May 22, 2022, when crude prices were already very high. As a result, the three oil marketing companies posted a combined net loss of ₹18,480 crore in the June quarter.

Fuel prices had remained unchanged for four and a half months in India till March 22, 2002, but just after the Uttar Pradesh elections, prices were increased 14 times till May 20 causing at least ₹10 per litre rise in petrol and diesel prices. By that time, crude oil prices were hovering above $120 a barrel.

In recent weeks, the OMCs were pressurising the government to not effect further cuts to recover their losses. An ICICI Direct report on September 8, 2022, on oil and gas sector noted that OMCs did not pass on the increase in crude oil costs to customers, which resulted in weak marketing margins. "Crude oil prices were trading at elevated levels but prices of petrol and diesel at retail outlets were steady," it noted.

"Gross marketing margins for diesel remain significantly negative, even after adjusting the windfall levies, thus indicating a drag on OMCs earnings. Also, gross refining margins (GRM), net of windfall levies, have fallen, while inventory losses are likely as well. Hence for Q2 FY23, we may see losses continuing for OMCs, albeit to a lower extent quarter on quarter (QoQ)", said a recent research analyst report from Emkay Research.

Union Minister oil minister Hardeep Singh Puri in early September had indicated the international oil prices need to come down below $88 per barrel to help the OMCs recover losses. In this scenario, the OPEC move to push crude prices above$100 per barrel is likely to force the government to further increase petrol and diesel prices, say sources.

As part of the moves to de-risk India's dependence on OPEC for oil, a couple of weeks ago, Indian Oil signed a first-ever term contract with Brazil's Petrobras to source 1.7 metric million tonnes oil per annum (MMTPA). BPCL is also collaborating with Petrobras for refining, biofuels and exploration.

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