The government’s decision to hike auto fuel prices has evoked mixed reactions. Various analysts have claimed the decision will boost Oil & Natural Gas Corporation (ONGC) profit but oil marketing companies (OMCs) will continue to incur losses. However, Morgan Stanley estimates impact on wholesale price inflation will be about 45 basis points. The price increase will have a direct impact of about 21 basis points on wholesale price inflation, which was at -1.14% year-on-year during the week ending June 13. This price rise could have a cascading impact of approximately the same magnitude that could be felt in the next 3-4 months.
On the other hand, Citigroup said given that petrol and diesel have a weight of 2.9% in the WPI, the fuel price hike would have a 30 basis point on inflation. It expects inflation to cross 4% levels by year end. On rates, bond yields are likely to stay in the 6%-7% range due to the RBI’s continued participation in the borrowing programme. The 6-9% hike in auto fuel prices is the first rise since June 2008. The price hike has come after hefty losses on gasoline and diesel marketing throughout June 2009. Auto fuels are still subsidised even after the price increase.
Merrill Lynch said the auto fuel price hike will mean lower subsidy for ONGC and boost its profit while. The total subsidy burden for the country will fall by $4 billion on an annualised basis from $9.4 billion previously to $5.4 billion, assuming crude oil prices average about $70 per barrel for 2009-10. However, Goldman Sachs believes that if upstream companies are asked to bear the entire subsidy for cooking fuels, it would be a major negative surprise for ONGC. The upstream subsidy payout has been lower than cooking fuel losses in all the years so far. It remains skeptical on whether the government would allow ONGC to make more profit at the cost of oil bonds.
According to Morgan Stanley, upstream companies–ONGC and GAIL India would be positively impacted as they have to share a lower subsidy burden since the overall subsidy in the system reduces. As far as downstream companies (HPCL, BPCL, IOC) are concerned, it estimates that they would reduce losses on sales of petrol and diesel to Rs 0.5/litre ($1.0/bbl) on petrol and Rs 0.25/litre ($0.9/bbl) on diesel sales. They were earning Rs 4.5/litre and Re 2.25/litre on petrol and diesel, respectively, before the price hike. However, losses on sales of kerosene and LPG would still continue.
On the other hand, Goldman Sachs said fuel prices hike was a surprise but it indicates no reform and no oil bonds. It is unlikely that government will go in for decontrol now. According to Morgan Stanley, the new government had promised to take steps toward decontrol of fuel prices in a hundred days after coming into power. The government has taken the first step in 45 days toward decontrol; however, the uncertainty on regulations still prevails as the government has not yet revealed the subsidy-sharing formula.