Strait of Hormuz opens again, but will petrol and diesel prices fall?

The Strait of Hormuz has reopened after a US-Iran understanding eased immediate supply concerns. The move may cool crude prices, but any relief in petrol, diesel and LPG is likely to be limited and gradual.

In Short

• Strait of Hormuz reopening eases crude oil prices concerns
• India imports over 85% of crude oil; disruption raises inflation fears
• Petrol, diesel prices may fall only if crude stays below $80 long-term

For weeks, Indian households watched with concern as the conflict in the Middle East pushed crude oil prices higher and threatened the Strait of Hormuz, the world's most important oil shipping route.

The fear was simple: expensive oil could eventually mean higher fuel costs, inflation and pressure on household budgets.

Now, with the Strait of Hormuz reopening after a US-Iran understanding reduced immediate supply concerns, crude oil prices have started easing. The biggest question for Indians is whether this will translate into cheaper petrol, diesel and LPG cylinders.

The answer is not straightforward.

WHY THE STRAIT OF HORMUZ MATTERS TO INDIA

The Strait of Hormuz is a narrow sea passage between the Persian Gulf and the Gulf of Oman, but its importance to the global economy is enormous. Nearly one-fifth of the world's oil and a significant share of LNG supplies pass through this route.

For India, which imports more than 85% of its crude oil needs, any disruption in the Strait of Hormuz can increase the country's import bill, weaken the rupee and put pressure on inflation.

The reopening of the route reduces fears of a supply shortage and could help keep global crude prices in check. Lower oil prices would be positive for India because they reduce the cost of imports and ease pressure on the economy.

WILL PETROL AND DIESEL PRICES FALL NOW?

A fall in global crude oil prices does not immediately mean lower prices at Indian petrol pumps.

Dr Manoranjan Sharma, Chief Economist at Infomerics Ratings, said petrol and diesel prices are likely to see meaningful cuts only if crude oil remains sustainably below around $80 per barrel.

He said oil marketing companies (OMCs) are still recovering earlier under-recoveries and are focusing on improving their financial position.

"Prolonged low crude prices, rather than temporary corrections, are needed for substantial retail price cuts," he said.

According to Sharma, even if prices are reduced in the near term, the cut is likely to be limited to around Rs 2-4 per litre and would be carefully calibrated rather than bringing prices back to pre-war levels.

WILL PRICE OF LPG CYLINDER FALL?

The outlook for LPG prices also points towards selective relief rather than a broad reduction.

Sharma said the government has already supported households through periodic LPG price cuts and subsidies, including a Rs 200-per-cylinder subsidy for Pradhan Mantri Ujjwala Yojana (PMUY) beneficiaries.

Eligible households can receive support for up to 12 subsidised domestic cylinders every year, although the amount varies across different cities.

If global LPG and crude oil prices remain lower, the government's subsidy burden could reduce, giving it more room to manage prices.

However, Sharma said any further LPG relief will depend on international energy prices, government finances and policy priorities, meaning benefits may be targeted rather than available to all consumers.

HOW DOES IT AFFECT YOUR MONTHLY BUDGET?

Lower energy prices can provide relief to families by reducing spending on cooking fuel and limiting the rise in transportation costs.

However, the impact may not be dramatic.

According to Sharma, existing subsidies and earlier LPG price reductions already provide support to lower-income households. At the same time, limited pass-through of crude oil price declines to petrol and diesel prices, along with OMC financial considerations and the government's fiscal priorities, may restrict the overall benefits.

As a result, savings from lower energy prices may only partly offset rising costs of food, education, healthcare and other household expenses.

WHAT DOES IT MEAN FOR THE RUPEE AND MARKETS?

Lower oil prices can also benefit India's financial markets and currency.

During the period of higher oil prices and global uncertainty, India witnessed large foreign investor outflows. According to Sharma, FII outflows exceeding $20 billion can weaken the rupee, increase exchange-rate volatility and force the Reserve Bank of India to intervene by selling dollars.

While RBI intervention can control sharp movements in the currency, it cannot completely prevent depreciation and may reduce foreign exchange reserves.

However, Sharma noted that India's large forex reserves, strong services exports and resilient external sector provide a strong cushion against such shocks.

The reopening of the Strait of Hormuz and easing tensions between the US and Iran are positive developments for India, especially because they reduce fears of an oil supply crisis.

But consumers should not expect immediate or sharp reductions in fuel bills.

For petrol and diesel prices to see meaningful cuts, crude oil will need to remain lower for a prolonged period. Until then, any relief at the petrol pump or in LPG prices is likely to be gradual, limited and dependent on government and oil company decisions.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)

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