Margins of oil marketing companies (OMCs) could be hurt if they refrain from passing on costs of the increase in the price of Brent crude oil, which has risen to a four-year-high of $71 per barrel, to the full extent.
Bloomberg reported on Wednesday the government has asked OMCs to prepare to absorb some impact of the rising oil prices.
“Companies including Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp will have (to) bear a loss of up to `1 per litre on sale of diesel and gasoline, sources said, asking not to be identified as the matter is private,” Bloomberg said in its report.
However, PTI, later in the day, reported that the heads of IOC and HPCL denied that the government had asked them to avoid raising retail prices of petrol and diesel. Oil minister Dharmendra Pradhan refused to take questions on such a diktat that essentially would mean a reversal of reforms, the PTI report said.
According to estimates by analysts at Jefferies, for a `0.10/litre change in the auto fuel marketing margin, earnings per share of OMCs —HPCL, BPCL, IOC — are impacted by 1.6-3.8%.
Given this, a `1 reduction could translate into a 16-38% reduction in earnings per share. Share prices of
OMCs slipped by 6-7% on Wednesday.
If OMCs are unable to pass on the hike to consumers, this being the pre-election year, marketing margins of OMCs, which improved in the fourth quarter of FY18, could be impacted in FY19, said analysts.
“OMCs could not take price hikes in auto fuels due to Gujarat elections in Q3FY18. However, since then, they have steadily increased auto fuel prices. The gross marketing margins have improved to Rs 3.2/litre and Rs 3.4/litre on petrol and diesel in 4QFY18 from `2.2/litre and `2/litre, respectively, in 3QFY18,” a Motilal Oswal Securities report said.
Higher crude oil prices are negative for the country, as India imports more than 80% of its requirement. With FY19 being an election year, analysts expect that retail fuel prices will be kept under check.
Gaurav Moda, partner and head of oil & gas at KPMG, sees strengthening of crude to $71 as a two-three-month phenomena, driven by US president Donald Trump’s trade negotiations with China. “Once negotiations open up, it is likely that crude prices will soften. Besides, the US is expected to become the largest exporter of crude, which will create an oversupply situation in the market, further tempering prices. The two scenarios together will not let the crude cross $75 per barrel in 2018,” Moda said.
“By the time OMCs will report their full year numbers in March 2019, prices would have ebbed to below $70 per barrel,” he said.