As Russia has kicked off a full-scale military operation aimed at demilitarizing Ukraine, crude oil prices have seen a sharp jump to seven-year highs. On Monday, Oil prices jumped over $7 after Russian President Vladimir Putin put the country's nuclear deterrent on high alert in the face of Western nations and Japan stepping up sanctions against Russian banks.
The nuclear alert and bank payment constraints heightened fears that oil supplies from the world's second-largest producer could be disrupted as Russia digs in following its invasion of neighboring Ukraine.
The Brent Crude Futures hit $105.79 per barrel, a 7-year high as the invasion began. The US West Texas Intermediate also hit a record of $100.54 per barrel.
Most experts believe that crude oil prices are likely to remain over $100 per barrel for the foreseeable future. This poses a problem for India, as over 80 percent of the country's oil requirement is met through exports. So a continued rise in crude oil prices is likely to lead to a surge in domestic oil prices, thus increasing inflation in India. And a rise in inflation will definitely force the Central Bank to increase interest rates at a faster pace.
"The ongoing geopolitical turf between Russia and Ukraine will keep the oil prices buoyant at least in the short term and we envisage WTI crude prices to test levels of around $105 per barrel and $110 per barrel for Brent crude in coming days. However, prices are likely to remain capped at these higher levels, as markets are hopeful about the removal of sanctions on Iran oil sales very soon, which can add to the global supply," said Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking.
The petrol and diesel prices in India have remained unchanged since November 2021 when the government of India cut the excise duty on petrol and diesel by ₹5 and ₹10, respectively. Many states also announced a reduction in value-added tax (VAT) on fuel prices as well on the back of upcoming state elections.
In November last year, the crude oil prices were trading around $80 per barrel. Since then, the global prices have jumped over $100 per barrel, however, the Indian government has not transferred the rise in global crude prices to the domestic petrol, diesel prices till now due to elections.
“Russia accounts for one in every 10 barrels of oil consumed globally, so it is a major player when it comes to the price of oil and it’s really going to hurt consumers at the petrol pumps," said Navneet Damani, Sr. vice president, commodity and currency Research.
However, experts believe that the government is likely to announce a steep hike in petrol and diesel prices in early March, with respect to the rise in global crude prices once the state assembly elections end.
As per an SBI report, if the VAT structure remains the same and the global crude oil prices continue to be around $100-$110 per barrel, then the petrol and diesel prices should already have risen by ₹9-14 per liter. This rise will soon be witnessed in the domestic oil prices.
This will not only increase inflation but also widen the current account deficit.
As per the economic survey, the government was hoping the crude oil prices to be in the range of $70-75 per barrel in FY23.
“If the high crude prices remain at high levels it can be a major macro headwind for the Indian economy. Our trade deficit will widen, the rupee will depreciate and inflation will rise. Even if the government absorbs part of the crude spike through excise cuts, part of the hike will have to be passed on to consumers resulting in cost-push inflation. The RBI will be forced to withdraw from the accommodative monetary stance that they have been following since the outbreak of the pandemic. But if the crisis blows over soon, crude will come down the situation will stabilise," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.