Lower Crude Is Double Edged Sword For Oil Marketers As Price Cut, Excise Hike Concerns Will Rise

US President Donald Trump’s tariff announcements and OPEC+'s decision to gradually roll back the 2.2 million barrels per day voluntary production cuts from April will have a lasting impact on Indian upstream companies, as their realisations will take a hit. On the other hand, downstream companies can breathe a sigh of relief as lower oil prices would ease the pressure of high costs.

However, downstream companies may face demands due to retail fuel price cuts, near-term inventory losses and excise hike that could impact their margins.

The rollback of OPEC+'s production cuts, which starts in April 2025, will gradually increase oil supply, potentially keeping prices low. The reversal of production cut is 38% of the 5.9 million barrels per day of cumulative cuts taken by OPEC+ from October 2022 to November 2023. This will lead to more than 0.1 mbpd increase every month, starting this April.

OPEC+ decision will take effect from April 2025 and will continue until September or December 2026. Although, this move may lead to a decline in oil prices — which have already started weakening from over $80 per barrel to close at $69 per barrel on March 5 — the US tariffs on Canada, Mexico, and China, along with the US-Ukraine-Russia scenario, have created further uncertainties in the market.

“While this (the reversal) was expected, the magnitude and a possible Trump hand, could create near-term bearish sentiments in the lean spring season,” said Sabri Hazarika, oil and gas analyst at Emkay Global.

There is a case for oil prices falling to the $60s temporarily, though $70-75/barrel could be a more probable range now, against $75-80 per barrel earlier. A sharply lower oil price, contrary to conventional wisdom, can be detrimental to the Indian oil and gas sector, affecting upstream realisations and gas economics, compared with oil. “OMCs would tend to gain, but price cuts and excise hike concerns will surface, coupled with heavy near-term inventory losses,” Hazarika said.

US tariffs on Mexico, Canada and China are widely expected to speed up US inflation and slow economic growth in the near term could lead US, Canada and Mexico into recession, according to experts.

"From an oil and gas perspective, these tariffs are expected to impact the cost competitiveness of Canadian and Mexican Crude, which are imported by some of the US Midwest and Gulf Coast refiners," Ashwin Jacob, partner and head, energy, resources and industrials at Deloitte India.

"This in turn could have a material impact on crude and product trade in that region. Unless the tariffs settle down into a negotiated equilibrium, these could have a recessionary impact on the two economies, and in turn impact their oil consumption," said Jacob. "The effect of both these could be a greater downward pressure on global crude prices, which are anyway battling bearish market sentiments."

According to analysts, OMCs are back in the sweet spot with gross marketing margins of diesel and petrol at Rs 8/12 per litre. It more than offsets Rs 250 per cylinder of LPG under-recoveries, which can fall further with upcoming summer seasonality. Hence, OMCs can report strong earnings like Q3 FY25.

“While Q4 FY25 still seems weak, some LPG subsidy (we have assumed Rs 20,000 crore) can come, given comments from the petroleum minister, secretary, and OMCs themselves, which along with any hike in LPG prices can be material triggers,” Hazarika added.

Upstream oil companies such as ONGC and OIL, whose earnings are pegged at $75 per barrel, could see their net oil realisations decline 6-9%. This is because realisations on gas from New Wells would be hit as they are linked to the Indian basket of crude oil, he said.