India cuts windfall tax on domestically-produced crude oil by 8% effective June 1, following a reduction of over 32% two-week ago

Following a reduction of over 32 percent two weeks ago, the government of India cut the windfall tax on domestically-produced crude oil by 9 percent, effective June 1, 2024. The objective of this tax cut is to align the price of Indian-origin crude oil with its prevailing prices in international markets. Revised fortnightly, the windfall tax is collected in the form of Special Additional Excise Duty (SAED) on the super-natural gains made by the oil exploration and production companies.

According to a government notification, the SAED on the domestically-produced crude was reduced to Rs 5,200 a tonne (US$62.33), effective immediately, from Rs 5,700 fixed two weeks ago. In the previous reduction on May 16, 2024, the government had cut the windfall tax on the locally-originated crude from Rs 8,400 a tonne. The SAED on the export of diesel, petrol, and jet fuel or aviation turbine fuel (ATF) has been retained at ‘nil’.

A surprise move
The reduction in the windfall tax surprised industry stakeholders as this decision goes against the principles laid out in the draft. Normally, the windfall tax is tweaked in sync with the movement in international crude oil prices. Changes in the tax behaviour have a direct bearing on the profitability of domestic crude oil producers such as ONGC Ltd, and Oil India Ltd. Therefore, the reduction in the windfall would benefit these public sector companies.

However, it remains to be seen whether these companies pass on the tax reduction benefit to consumers. It is worth mentioning here that the government has already slashed prices of crude oil derivatives such as petrol, diesel, and aviation turbine fuel (ATF). Value-added products such as polymers and plastics have also seen a substantial decline in their prices in recent months.

Stable crude oil prices
Crude oil prices remained mostly stable in the last two weeks as traders awaited the outcome of the scheduled OPEC+ (Organisation of the Petroleum Exporting Countries and its allies) meeting in Vienna in early June. Analysts forecast that OPEC+ leaders may extend the 2.2 million barrels per day (bpd) of voluntary production cut beyond June 30, 2024.

In April this year, OPEC+ members decided to exercise another round of voluntary output cut by 2.2 million bpd to support an upward movement in international crude oil prices. A similar move of 1.657 million bpd of production cut was announced in April 2023, which supported the crude oil prices rise, albeit temporarily, as an estimated decline in demand this year coupled with stellar growth in the energy production in the United States kept the prices under pressure.

According to Polymerupdate Research, the benchmark Brent crude futures on the New York Mercantile Exchange (Nymex) moved in a close range of US$1-2 a barrel during the fortnight ending May 31, 2024, due to uncertainty in the crude oil demand and supply. The Brent crude futures for near-month delivery closed with a marginal variation during the fortnight, before closing at US$81.62 a barrel. Similarly, WTI Cushing contract for near-month delivery closed with a rangebound variation between US$1 and 2 a barrel during the fortnight between May 16 and 31, 2024, before closing at US$76.99 a barrel.

Earlier, on April 16, 2024, the government had increased the windfall tax on petroleum crude from Rs 6,800 a tonne to Rs 9,600 a tonne. As of April 3, 2024, the windfall tax was increased on petroleum crude, elevating from Rs 4,900 a tonne to Rs 6,800 a tonne. Originally introduced in July 2022, this fiscal measure serves as a regulatory tool targeting private refiners who were redirecting fuel exports abroad to seize the opportunity of wider refining margins instead of catering to the domestic market.

On March 15, the finance ministry opted to increase the windfall tax on domestically sourced crude oil to Rs 4,900 a tonne, marking a rise from the earlier SAED of Rs 4,600 a tonne that was in effect during the preceding fortnight. Furthermore, on February 16, the government chose to increase the windfall tax on petroleum crude from Rs 3,200 to Rs 3,300 a tonne and introduced a tax of Rs 1.5 a litre on diesel, which had previously been exempt from taxation.

The general formula for this supernatural tax is based on specific criteria. The windfall tax is activated when global benchmark rates soar beyond US$75 a barrel for domestic crude oil or when product cracks, indicating the margin discrepancy between crude oil and final petroleum products, exceed US$20 a barrel for diesel, ATF, and petrol exports. Presently, crude oil prices are hovering around US$83 a barrel, approximately US$8 a barrel higher than the minimum threshold for the implementation of the windfall tax of US$75 a barrel.

IEA’s demand forecast
Paris-based International Energy Agency (IEA) lowered its oil demand growth forecast by 140,000 barrels per day (bpd) to 1.1 million bpd for the calendar year 2024 due to contraction in demand in the Organisation for Economic Co-operation and Development (OECD) countries. The IEA said in its monthly Oil Market Report that the lower demand projection for 2024 was linked to the poor industrial activity, especially in Europe, and a mild winter sapping gasoil consumption, particularly in Europe where a declining share of diesel cars was already undercutting crude oil consumption. Poor industrial activity was notable in Europe. Following a 210,000 bpd annual contraction in 2023, European gasoil demand declined by another 140,000 bpd yoy in the January-March 2024 quarter.

OPEC+ meeting agenda
The health of global oil demand will likely be a key topic for discussion when OPEC+ ministers meet in Vienna on June 1 to chart production policy for the remainder of the year. Despite the recent weakness, the current balances show the call on OPEC+ crude oil at around 42 million bpd in the second half of this year – roughly 700,000 bpd above its April output.

Next year, the market looks more balanced overall. Even if OPEC+ voluntary production cuts were to stay in place, global oil supply could jump by 1.8 million bpd compared with this year’s more modest 580,000 bpd annual increase. Non-OPEC+ output is forecast to expand by 1.4 million bpd in both years, while OPEC+ output flips from an 840,000 bpd decline this year to growth of 330,000 bpd in 2025. The United States, Guyana, Canada, and Brazil continue to dominate gains, even as the pace of the United States supply expansion decelerates.

The June meeting may also look closely at global oil inventories as a gauge for the delicate balancing act of world oil demand and supply. Preliminary data show further stock builds in April as onshore inventories skyrocketed after oil on water was discharged. Increasing trade dislocations had pushed oil on water to a post-pandemic high in March, while onshore stocks were at their lowest since at least 2016. A return to historical average stock levels will be the key to evade renewed market volatility.

Accelerating domestic demand
India’s demand for petroleum products is projected to increase by a mid-single-digit percentage point in the financial year (FY) 2023-24 (which ended in March 2024), following a 10 percent upsurge in the previous financial year due to the post-pandemic economic recovery, according to a recent Fitch Rating report. Both petrol and diesel witnessed a robust 4-6 percent increase in the period between April and December 2023, driven by heightened economic activity in the agriculture and power sectors, as well as a surge in holiday travel and auto sales.

The report further estimates that Indian refiners’ gross refining margins will moderate during FY 2024-25 from the strong levels expected in FY 2023-24 but will remain above mid-cycle levels. By 2025-26, however, a shift closer to mid-cycle levels is foreseen, with resilience bolstered by the escalating demand for end products. The gradual normalization of the crude supply mix away from Russian imports is likely to narrow gross refining margins, which may remain strong, supported by the rising demand for end-products, the rating agency observed.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com