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Fresh crude spike a headache for oil firms

New Delhi, June 7: The renewed surge in crude prices has raised concern that oil marketing companies may have to rework their oil equation and share the additional burden as the government is unlikely to opt for a back-to-back hike in fuel prices.

Crude leapt $10.75 in the New York futures market — its biggest one-day jump ever — to close at a record $138.54 amid mounting tension between Israel and Iran.

Investment banker Morgan Stanley has already predicted that oil prices will touch $150 a barrel by July 4 because of strong demand in Asia.

Petroleum ministry officials said the government was keeping close watch on the international market and wait to see whether crude prices come down or not.

The average price for the Indian basket of crude this month is hovering around $118 a barrel and the officials expect prices to come down.

Earlier this week, the government had increased fuel prices — petrol by Rs 5 a litre and diesel by Rs 3 a litre — to give some respite to oil marketing companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum.

Given the widespread political opposition to the hike announced on Wednesday, analysts said it would be suicidal for the government to even contemplate another hike in the coming months.

With several states scheduled to go to the polls this winter and a Lok Sabha election early next year, it will be bad politics, they felt.

Moreover, any further increase in the price of diesel, the country’s primary transport fuel, could lead to fresh inflationary pressure.

While arriving at the quantum of fuel price hike, “calculations were made on the basis of $113 a barrel and with the hope that crude prices will fall to $100 later in the year,” officials said.

“This would have wiped off the additional gap significantly,” they added.

Oil companies were estimated to suffer a loss of Rs 245,305 crore in 2008-09 assuming an average price of the Indian oil basket at $125 per barrel.

However, a combination of fuel price hike, duty rejig and fresh oil fresh bonds will bring down the gap between domestic and global crude prices to about Rs 41,992 crore. An increase of $1 in crude price results in an additional under recovery of Rs 3,000 crore to oil companies.

The fresh surge in crude could throw all these calculations off track and put considerable pressure on the financials of oil companies.

“The finance ministry is becoming increasingly reluctant to give more oil bonds. So the additional burden may fall on oil companies,” officials said.

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