How will fuel price cut impact oil companies?

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The Government is likely to cut fuel prices today. Petroleum Minister, Murli Deora is expected to announce the cut in Parliament. Sources in the ministry have confirmed that petrol prices will be reduced by Rs 2 and diesel prices by Re 1, reports CNBC-TV18.

Margins are positive on petrol to the tune of Rs 4 a litre. However, on diesel, margins are still negative close to 45 paise a litre. There are still huge losses on account of LPG and kerosene sales. CNBC-TV18 understands from government sources that under recoveries for this year would be to the tune of Rs 55,000 crore. This could still go up if crude doesn't stabilise over the USD 55 mark and that does not seem likely.

Subsidy burden would mean that there would be still no relief for upstream companies. Last month, when crude had cooled off considerably and the government has ruled out any reduction in fuel prices, government sources suggested that there could be some relief for ONGC .

Since the government is taking its cues from 10 Janpath rather than OPEC - (Organisation of the Petroleum Exporting Countries), this may not happen any more.

Oil marketing companies seem to have resigned themselves to political whims. They are still make huge losses, for example, IOC is making losses to the tune of Rs 40-42 crore a day.

But a reduction in diesel prices might not affect them too much because they are still making positive margins on petrol. Petrol accounts for 8% of total fuel sales.