The OMCs could have cut prices now as the crude prices are hovering below $80/barrel, a threshold for doing so, but for the heightened uncertainties due to geopolitical tensions.
Retail prices of petrol and diesel are likely to be cut by state-run oil marketing companies (OMCs) to some extent, just ahead of the general election scheduled in April if crude prices remain below $80 a barrel through this period, sources said.
The OMCs could have cut prices now as the crude prices are hovering below $80/barrel, a threshold for doing so, but for the heightened uncertainties due to geopolitical tensions. A retail price cut now would have made it difficult for OMCs to raise prices till elections were over even if crude prices shot up.
“So, if crude prices settle down below $80, some retail fuel price cut is possible, but not until (close to) the elections,” an official said.
The three OMCs—Indian Oil, BPCL and HPCL– are expected to continue making profit till the oil price remains below $85 a barrel, analysts have said. Due to the Russia-Ukraine war, the Indian basket of crude prices shot up by an average of 18% in FY23 to $93.15/barrel compared with $79.18/barrel in FY22, leading to huge marketing losses by OMCs as they could not pass on the prices to consumers. The Indian basket averaged $74-75/barrel in May and June 2023, $80.37 in July, before rising to $93.54 in September. It has since moderated to $90.08 in October, $83.46 in November and 79.22 in January 2024.
Retail fuel prices in India have been frozen since May 2022. However, this price control has been during both rising and falling crude prices, allowing OMCs to recoup their FY23 losses in FY24.
Currently, OMCs are making over recoveries of Rs 6/litre on diesel and Rs 11/litre on petrol.
“If crude prices remain under $80/bbl then there is room for a cut in auto fuel prices (as it will not hit their marketing margins),” said Prashant Vasisht, Senior Vice President, Co-Group Head, ICRA.
In a note, rating agency Fitch said the OMCs are likely to report record-high EBITDA (earnings before interest, taxes, depreciation, and amortization) in FY24, given strong gross refining margins (GRMs) and steady marketing profit after large retail losses in FY23.
“Heightened volatility in crude prices amid emerging geopolitical risks, and/or cuts in India’s retail diesel and petrol prices, which have been constant since May 2022, present downside risks to our profitability estimates,” Fitch said.
The OMCs’ significantly improved profitability has prompted the government to halve its budgeted equity support to the OMCs to Rs 15,000 crore and postpone it to FY25 from FY24.
Source:financialexpress.com