Recession fears pushed crude oil prices to their lowest in eight months last week and despite some recovery since then, it still trades around 40 percent lower than the highs of around $139 a barrel witnessed in March. But there is no reason to cheer just yet as the benefit may not reach consumers soon or to the full extent.
The weakness in Rupee means import bills would continue to be high for refiners. Moreover, oil marketing companies (OMCs) have incurred huge losses on petrol and diesel retail sales this year and may take more time to recover the past losses.
“At the current crude prices petrol sale has turned profitable but OMCs are still making losses on diesel. The accumulated losses for the current fiscal alone remain high and if crude remains around $90 a barrel, it is unlikely that fuel prices will be reduced significantly even in the next two quarters,” a senior official with a state-run OMC told Moneycontrol on condition of anonymity.
In a media interaction this month, Minister of Petroleum and Natural Gas Hardeep Singh Puri has said a few times that the OMCs need more time to recover their losses despite falling crude prices.
Benchmark Brent fell below $85 a barrel on September 26 for the first time since January. US West Texas Intermediate (WTI) crude futures is now below $78 a barrel. But experts and industry players point out that any decision on fuel price may be impacted by many factors.
Recouping Losses
State-run OMCs, Indian Oil Corporation Ltd (IOCL), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) reported a staggering combined loss of Rs 18,480 crore in the first quarter of 2022-23 hit by losses in auto fuel sales. They kept retail petrol and diesel prices unchanged for almost 137 days despite the benchmark crude oil prices soaring. OMCs resumed increasing the price of petrol and diesel only from March 22 but that too did not cover the losses they were making.
Typically, OMCs – Indian Oil Corporation Ltd (IOCL), BPCL and HPCL – revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the past 15 days. Private companies including Nayara, Reliance Industries and Shell set prices on their own, but given the competition, they benchmark it to prices set by the OMCs.
“While OMCs now earn a healthy margin on gasoline, gasoil losses sustain, despite a 35% fall in spreads over one month. Government has a challenge to balance contrasting factors -health of OMCs, attractive compensation for upstream without adversely affecting its own fiscal, and end-consumer prices,” IIFL Securities said in a report dated September 21. The report said that the shares of the state-run OMCs trade at cheap valuations reflect such issues.
Recent media reports suggest that the government plans to pay about Rs 20,000 crore to the state-run OMCs to partly compensate them for losses and keep a check on cooking gas prices. But the modalities of this payment are not yet known and the quantum may not be enough to erase earlier losses, two industry officials said.
Rupee Weakness
While crude oil prices have softened, Rupee has hit a record low of 81.55 as Dollar soared to its highest in two decades. This does not augur well for India and particularly the oil refiners who will bear the brunt of expensive import of crude oil.
“Hawkish Fed outlook, political instability in China and sell-off in pound after the tax cut announcement is also disturbing the overall market sentiment. This week, the Reserve Bank of India (RBI) will release its policy statement and this is likely to influence the rupee that is currently falling sharply against the US dollar,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.
While all eyes would be on the RBI, which is scheduled to announce its bi-monthly monetary policy later this week, the weakness is Rupee would be a key factor affecting fuel prices.
Rebound In Crude
The softening in crude oil prices may not last and there is a strong case for it to bounce back and reverse the trend soon, experts believe.
Central banks across the world are maintaining an aggressive stance on rate increase and that may slow economic activity and hurt short-term outlook on crude. Also, as the sanctions on Russia become more severe due to the ongoing war with Ukraine, the global supply may remain tight.
JPMorgan expects Brent crude to take a U-turn and head back toward $100 a barrel in the October-December quarter as supply tightens. In a report on September 19, JPMorgan said, “Our commodity strategists continue to forecast oil in 4Q22 to average around $100/bbl driven by a number of factors. One, after oil balances having been in surplus over the summer, they are set to shift to a deficit in 4Q; two, with the global economy avoiding a recession in our baseline scenario, demand looks set to remain resilient and there should be an increase in oil use for electricity and/or heating to substitute for expensive gas; three, with the EU embargo on Russian crude from Dec 5th and on oil products from Feb 5th, Russian oil supply may have to fall as not all of the supplies can be re-routed to other markets; and four, we do not see many countries outside of the G7 alliance joining the price cap coalition.”
Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries (RIL) is the sole beneficiary.
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