Why Petrol, Diesel Prices May Start Falling Soon

Petrol and diesel prices were raised by a hefty 5-5.5 per cent last week tracking global crude oil prices, which jumped to 2015 highs near $67 per barrel and the depreciation in the rupee. It was the second big hike in domestic petrol and diesel prices in May. (Read)

 

The two consecutive hikes in petrol and diesel prices this month have wiped away more than one-third of the gains that had accrued to consumers over the last 9-10 months.



 

Rising petrol and diesel prices is bad news for consumers; it threatens to stoke inflation and may weigh in on the incipient economic recovery. It may impact car sales that have started showing signs of recovery after many years.



 

However, two big investment banks say that there are little reasons to believe that crude oil prices will continue to trend higher.



 

According to Goldman Sachs, Brent oil prices are likely to stay at $65 per barrel between 2016 and 2018 and they are likely to cool further to $55 per barrel by 2020. Goldman’s optimism stems from the fact that production in Middle East is not slowing down.



 

According to Nomura, further Saudi production increases are likely, which will pressure crude oil prices. Next OPEC meeting on June 5 will not bring any change in Saudi oil policy, the brokerage added.



 

Critics of the oil rally also point to a market that remains oversupplied nearly a year after the selloff in crude began last summer, knocking prices off highs above $100 a barrel.



 

The International Energy Agency said last week that key producers in OPEC are pumping at least 2 million barrels per day (bpd) more than required.



 

The US Energy Information Administration says world stocks are rising at 1.95 million bpd this quarter and will build at least through 2016.



 

US demand for fuel is likely to pick up in the second half but global production runs well ahead of consumption. Without a major, unexpected disruption, the glut will stay, analysts say.



 

The only joker in the pack could be the rupee, which slumped to a 20-month low above 64 per dollar last week. However, the rupee rebounded smartly below 63.50 per dollar on Monday. According to a Reuters poll, the rupee is likely to trade around 64 per dollar over the next six to twelve months, which means that petrol and diesel prices could start coming down once again.

(With inputs from Reuters)