Crude prices continue to be the key concern for India at this juncture. With Brent Crude surging past the $111/bbl mark and the Nymex rates also nearing $110/bbl mark, the economic headwinds confronting the world’s third-largest crude importer are multi-fold. Petrol and diesel prices were increased after 4 years but Elara Capital believes that this may not be adequate to address the losses. They expect further hike in prices.
As a result of the elevated crude prices, with Brent surging over 40% between February 28 and now, petrol and diesel prices have been increased by Rs 3/litre. Though this is seen as offering some relief for oil marketing companies (OMCs), Elara Capital said that “price hikes are not enough to fully neutralise the current crude oil price shock”.
This is because “OMCs are still losing around Rs 6.40/litre on diesel and Rs 8.10/litre on gasoline on an integrated basis”. As a result, the brokerage believes that India may see “further retail price hikes in the next few weeks”.
Here’s a look at how the current fuel price hike may impact the OMC margins.
Tracking Rs 34,500 crore relief to OMCs
According to a Elara Capital’s estimates, after the Rs 3/litre price hike, annualised integrated petrol and diesel losses are expected to reduce from around Rs 1.42 lakh crore to Rs 1.07 lakh crore. This translates into a relief of nearly Rs 34,500 crore for the sector.
| Before Rs 3/litre hike | After Rs 3/litre hike | Relief/Reduction | |
|---|---|---|---|
| Annualised integrated petrol + diesel losses | Rs 1.42 lakh crore | Rs 1.07 lakh crore | Rs 34,500 crore |
| Annual diesel-related losses | Rs 92,300 crore | Rs 67,200 crore | Rs 25,000 crore |
| Annual petrol-related losses | Rs 49,300 crore | Rs 39,900 crore | Rs 9,400 crore |
| Diesel integrated losses/litre | Rs 8.80 | Rs 6.40 | Rs 2.40 |
| Petrol integrated losses/litre | Rs 10 | Rs 8.10 | Rs 1.90 |
Diesel-related losses may fall by Rs 25,000 crore
Diesel’s gross margin losses narrowed from about Rs 27.5 per litre to Rs 25.2 per litre. After adjusting for refining crack benefits of around Rs 18.90 per litre, integrated diesel losses reduced to around Rs 6.4 per litre from Rs 8.80 per litre earlier.
Annualised diesel-related losses are expected to decline from around Rs 92,300 crore to Rs 67,200 crore.
Petrol-related losses may fall by nearly Rs 10,000 crore
Retail gross margin losses on petrol declined from around Rs 15.5 per litre to Rs 13.7 per litre after the hike. After factoring in refining crack benefits of around Rs 5.60 per litre, integrated petrol losses reduced to about Rs 8.10 per litre from Rs 10 per litre earlier.
Annualised petrol-related losses are estimated to decline from around Rs 49,300 crore to Rs 39,900 crore.
Pain still there
However, Elara Capital estimates that, despite the price hike, companies are still losing around Rs 6.40 per litre on diesel and Rs 8.10 per litre on petrol, even after accounting for gains from refining margins and higher crude costs. The brokerage believes that diesel continues to be the largest earnings drag for OMCs, while relief on petrol remains incomplete.
Elara also noted that every $10 per barrel increase in crude oil prices could raise petrol and diesel losses by around Rs 6 per litre and LPG losses by about Rs 10.2 per kg. Although higher refining margins (GRMs) may provide some support, they are unlikely to fully offset the losses from fuel sales.
Conclusion
Elara Capital sees the fuel price hike after more than three years as a positive step. The brokerage reiterated that the move signifies that “India can absorb the first crude shock through excise/tax buffers, but beyond $110/bbl, the burden will gradually shift from the government to consumers and OMCs.”
“Unless crude prices correct, further retail price hike or additional fiscal support would be required,” Elara Capital said.