Why fuel price cut looks unlikely despite crude trading below $70

In India, retail fuel prices are linked to the rolling average of international benchmark prices over the past 15 days.

As crude oil prices tumble and hit a four-year low of $60 per barrel in April,  a debate has resurfaced around a potential cut in retail selling price of petrol and diesel—which have been left unchanged since March 2024.

However, experts tell Moneycontrol that India’s oil marketing companies (OMCs) might have their hands tied, despite sliding crude prices, for slashing fuel prices as high LPG under-recovery, inventory losses and weak gross refining margins (GRMs) weigh on the firms’ margins.

“Crude prices have now come to $66 per barrel. Prices have to sustain around $60 per barrel (for price cut). They (OMCs’ marketing margins) are healthy enough to do so. But again, you have to look at other parameters such as GRMs and inventory losses. The Q4 crude price average is around $75 (per barrel); $9 down from that basically means you have heavy inventory losses. So, that might take up to two quarters to get passed on to the end consumers. For OMCs, they are making healthy numbers on the core performance side, but on the reported side, they would have inventory losses which they need to cover,” Harshraj Aggarwal, Executive Vice President, Yes Securities told Moneycontrol.

Oil companies incur inventory losses when crude prices fall, mostly dramatically, by the time a refinery processes oil into finished products. Losses are incurred as the product prices are benchmarked to current prices. To be sure, before the refineries process crude oil, they tend to store or hold inventory for about 45-60 days.

Crude oil prices tanked to $60 per barrel in mid-April and are currently hovering around $66-$67 a barrel amid the global trade war and weak oil demand, compared to the highs of $80-$82 per barrel recorded in January.

India’s state-run oil marketing companies include Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL)—which have 90 percent of the market share in fuel retailing. Private sector auto fuel retailers such as Reliance-BP and Nayara Energy account for the remaining share.

Excise duty hike

As crude oil prices slide on account of potential oversupply in the global market and the global trade tussle, the Indian government on April 7 hiked excise duty by Rs 2 per litre on petrol and diesel. With no changes in the retail fuel prices, the OMCs would bear the burden of higher excise duty.

“There are two ways of looking at it. If you look at it from a mathematical perspective, a price correction implies that domestic prices can be cut. But then, is there a rationale to that do?  Whether we are looking at a scenario where petrol and diesel prices are adding to inflation or is it causing impact on demand. If that is not happening, then there is no merit in cutting prices. Even, recently, excise duty was raised by the government by Rs 2/ litre (on petrol and diesel). So, the benefit of decline of crude oil prices has actually been utilised by the government to soar up its revenues which gets utilised for other purposes, largely public welfare. So, while it might appear that there is a case, if you look at it from an economic rationale, there is very little merit or case to lower prices,” Nitin Tiwari, Vice President at PhillipCapital told Moneycontrol.

India’s oil minister Hardeep Singh Puri had told reporters that the increase in excise duty would be used to compensate state-run OMCs for the under-recovery incurred by the companies on the sale of LPG cylinders.

Added woes: High LPG under-recovery, weak GRMs

Despite healthy marketing margins, the OMCs have reported high under-recoveries of sale of LPG cylinders. Oil minister Puri said the three OMCs’ combined LPG under-recovery in fiscal 2024-25 (FY25) stand at over Rs 44,000 crore. The minister added that the government is committed to compensate the companies for the losses.

“The marketing margins are quite healthy. But on the other hand, there is under-recovery on LPG. From Q3 to Q4, the GRMs of almost all the products have declined further. So, the GRMs are not in good shape. So, if (crude) prices remain low, then there is room for price cut,” said Prashant Vasisht, VP & Co-Head, Corporate Ratings at ICRA.

GRM, or gross refining margin, is the difference between the prices of the refined petroleum product and crude oil, or the profit earned on turning each barrel of crude oil into refined product. Meanwhile, marketing margins are the profits earned by the company on the sale of petrol and diesel to consumers.

In India, retail fuel prices are linked to the rolling average of international benchmark prices over the past 15 days. OMCs have, however, left the retail fuel prices unchanged but slashed fuel prices in March 2024 ahead of the national elections. The oil refiners had then cut petrol and diesel prices in the country by Rs 2 per litre.

Crude trajectory in 2025

In 2025, crude oil prices have remained volatile on account of sweeping tariffs announced by the US President Donald Trump, calls of ramping up oil output globally and continuing weak demand from the world’s largest oil importer, China.

The year began with crude oil prices trading around $80 per barrel in January, which slumped to the four-year low of $60 a barrel in mid-April and trading below $70/bbl currently.

Despite lower prices, the Organisation of Petroleum Exporting Countries (Opec) and its allies, commonly known as Opec+, has decided to raise combined crude oil output by 4,11,000 barrels per day in May, further dragging crude prices.