Indian Government Eliminates Windfall Tax on Crude Oil as Global Prices Fall

Petroleum Price

• Oil prices fell on Wednesday and were set to snap a two-session winning streak ahead of a likely interest rate cut by the U.S. Federal Reserve, as weak macroeconomic data weighed on demand despite the potential for more violence in the Middle East.
• Brent crude futures for November were down by 45 cents, or 0.6%, at $73.25 a barrel, as of 0458 GMT. U.S. crude futures for October slid by 48 cents, or 0.7%, to $70.71 a barrel. MCX crude oil prices opened at 5918 with a fall of 1.19%.

Petroleum Demand and Supply

• On Tuesday, the Indian government scrapped the windfall tax on domestically produced crude oil to 'nil' per tonne, effective September 18. The tax, levied in the form of Special Additional Excise Duty (SAED), is notified fortnightly based on average oil prices over two weeks. The SAED on the export of diesel, petrol, and jet fuel (ATF) has been retained at 'nil'.
• Global benchmark Brent crude prices have fallen to below $75 a barrel from over $92 a barrel in April.
• Last month, the union government decreased the windfall tax on domestically produced crude oil from Rs 2,100 per ton to Rs 1,850 per ton on August 31. Prior to this, on August 17, the government had revised and lowered it from Rs 2,400 per ton to Rs 2,100 per ton.
• India first imposed windfall profit taxes on July 1, 2022, joining other nations that tax supernormal profits of energy companies. Additionally, it was extended to exports of gasoline, diesel, and aviation fuel, as private refiners sought to sell fuel overseas to benefit from robust refining margins instead of selling domestically.
• This is the second time since the tax was imposed that it has been reduced to zero. It was previously done by the government in April 2023.

Petroleum News

• Global crude oil prices have fallen sharply in recent weeks. The price of the variant of crude oil that India imports is currently around $73 a barrel. The last time crude oil was this low was around November 2021, just a few months before Russia invaded Ukraine and triggered a surge in oil prices globally.
• While there is growing clamor to cut retail prices of petrol and diesel, governments have been slow to respond, given the significant revenue support that oil provides.
• In the past five years, the Indian government has been more sensitive on the input side than on the output side.
• Adjusted for exchange rates, the price of crude for Indian refiners is currently ₹39 per liter. Back in June 2022, it was ₹57. Thus, against a gain of ₹18 on the input side, the price of petrol has been cut by only ₹2 in the past two years. However, with several state elections approaching, more cuts may be imminent.
• The U.S. EIA (Energy Information Administration) is expected to release official data on crude oil inventories later in the day. This data will provide insights into the crude oil inventory levels in the U.S.
• The market remains cautious ahead of the interest rate decision by the U.S. Federal Reserve on Wednesday. The market is expecting the U.S. Fed to reduce the interest rate by 25 to 50 basis points. Any reduction in the interest rate will make crude oil cheaper.
• Meanwhile, market reports indicate that the U.S. is seeking to purchase crude oil for its Strategic Petroleum Reserve (SPR). According to a Reuters report, the U.S. government will seek up to 6 million barrels of oil for the SPR. If completed, this purchase will match its largest replenishment of the reserve after a historic sale in 2022.

Expert Opinion

• The windfall tax on domestic crude oil has been reduced to zero, providing relief for petrol and diesel buyers. The government’s decision, effective from September 18, 2024, comes amid weak macroeconomic data that deepen oil demand concerns. Money managers have turned net negative for the first time since 2011.
• The end of the peak summer demand is also weighing on market sentiment. However, prices found some support from the potential for more violence in the Middle East, which may cause possible output disruptions in the key producing region following Israel's alleged attack on the militant group Hezbollah in Lebanon with explosive-laden drones.