Despite Indian oil marketing companies now making a profit of ₹11.1 per litre of diesel and ₹8.7 per litre of petrol, consumers hoping for a retail price cut amid persistently high inflation are unlikely to get any relief soon, analysts say. Image for representational purpose only.
With global crude oil prices slipping below $75 per barrel last week, Indian oil marketing companies (OMCs) are now making a profit of ₹11.1 per litre of diesel and ₹8.7 per litre of petrol, but consumers hoping for a retail price cut amid persistently high inflation are unlikely to get any relief soon.
Analysts believe OMCs will need two to three quarters of such profits to recoup losses incurred through 2022 as they had frozen retail prices for the two fuels since May 2022, when the government had cut the excise duty on both fuels amid high global oil prices following the Russia-Ukraine war.
The three OMCs – Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) — have incurred losses of ₹18,622 crore between April and December 2022, the Petroleum Ministry had informed Parliament last week, noting that petrol and diesel prices have not been increased despite record high international prices. Officially, petroleum products’ pricing is deregulated and OMCs are permitted to revise prices on a daily basis.
From an average of $105 a barrel in the first half of 2022-23, Brent crude oil prices averaged around $85 per barrel between October 2022 and February 2023, Moody’s Investors Service had said in a rating review of the three OMCs late last month. The agency had also noted that this downtrend along with increased purchase of discounted Russian oil had increased these firms’ profitability.
With the woes at U.S. and European banks stoking fears of a contagion effect and a demand slump, oil prices have plummeted below $75 a barrel, lifting the gross marketing margin for Indian OMCs to ₹11.1 per litre on diesel and ₹8.7 a litre on petrol, JM Financial said in a research note on the oil and gas sector.
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If crude prices sustain below $75-80 a barrel and “the government permits OMCs to recoup past losses” by not paring retail prices, “this should help them to partly recoup the huge net loss (of ₹50,000 crore) they incurred in the first nine months of 2022-23”, JM Financial analyst Dayanand Mittal said. “In the absence of government compensation, OMCs will take two-three quarters to recoup their losses at the current run rate,” he reckoned.
This January, the government had approved ₹22,000 crore as compensation to OMCs for losses suffered on account of domestic LPG sales. In the Budget for 2023-24, the Centre has allocated ₹30,000 crore as capital support for the oil marketing sector.
“Although the timing of the disbursement and the capital support mechanism remain unknown at this time, this development is credit positive and will further support the OMCs’ cash flows,” Moody’s had said, adding it expects the government to “remain supportive and compensate the oil marketing companies for their past losses”.
If oil marketing firms do indeed get some compensation from the government before the next three quarters, there may be some room for OMCs to lower prices earlier if global prices sustain at or below $75-80 levels.