State-run oil marketing companies (OMCs) could incur losses of Rs 10,000-15,000 crore a month unless they raise retail fuel prices or receive government support, analysts said, assuming the Indian basket of crude is around $100 a barrel.
The estimated potential combined losses of the three OMCs—IOC, BPCL, and HPCL—are computed after accounting for the immediate benefit of higher refining margins from low-priced crude inventories.
Brent crossed the psychological threshold of $100/barrel early Monday and soared further to a 45-month high of nearly $120 at one point, amid escalating conflict in West Asia. After the day’s trading, it closed around $102, still nearly 25% higher.
What do analysts say?
Oil marketing companies were making profits until crude hovered around $75 a barrel, analysts said. “The $25 jump (to $100) requires an increase in retail fuel prices by Rs 12 to Rs 13 per litre. In the absence of that, they could incur losses of Rs 10,000 crore -Rs 15,000 crore depending on inventory levels and other factors,” said an analyst tracking OMCs.
He said that on a net basis, OMCs are now making huge losses despite gains from old crude inventory priced lower. “Marketing losses are much higher than the refining margin gains they make through crude inventory,” he said.
The analyst said they may have to sustain losses until the tension eases in West Asia and crude prices come down, if the government chooses not to let them increase fuel prices.
E-mails sent to OMCs did not elicit any response by the time of going to press.
Sabari Hazarika, research analyst at Emkay Global Financial Services said a clear picture will emerge in April as OMCs will have gains from inventory until then. ” The losses will reflect after a month, he said.
Anuj Sethi, senior director at Crisil Ratings said marketing companies were able to report strong marketing margins during the first nine months of this fiscal, supported by favourable crude price dynamics and relatively stable retail fuel prices.
These accumulated margins provide some buffer to absorb the current high crude prices. However, the ability to sustain impact will depend on the duration of elevated crude prices, inventory levels and procurement costs,” Sethi said
If high crude prices persist, retail fuel price adjustments or fiscal support may become necessary, as sustained under-recoveries would otherwise pressure cash flows and profitability of OMCs, he said .
What happens if retail fuel prices are not adjusted
If retail fuel prices are not adjusted in line with rising crude costs, OMCs’ marketing margins could compress sharply, affecting profitability and operating cash flows. Prolonged margin pressure could lead to higher working capital borrowings. However, integrated refiners may partly offset this impact through refining margins, depending on global product spreads, he said .
Axis Direct in a report on Monday said the impact of rising crude prices depends on government pricing policies. “If retail prices remain capped, it will lead to margin pressure. If prices are passed on, it will lead to stable margins,” it said.