Eye on margins: Oil marketing companies hold fuel prices even as crude softens

By: |
August 20, 2021 4:15 AM

Direct and second-round effects of the high fuel prices are fuelling inflation in an economy struggling to come out of the woods.

The base price charged by the OMCs to the dealer, and hence, the retail motor fuel prices touched all-time high levels across the country on July 17 and have since remained at roughly the same levels.The base price charged by the OMCs to the dealer, and hence, the retail motor fuel prices touched all-time high levels across the country on July 17 and have since remained at roughly the same levels.

Though state-run oil marketing companies (OMCs) had consistently and promptly raised retail prices of petrol and diesel since early May this year to ‘match the rise in global crude rates’, they have been less than responsive to the softening of crude oil since mid-July.

Assumptions that the crude prices have yet to stabilise and may start swinging anytime soon is what OMCs are apparently guided by, but a delayed response to fall in crude price is seen as untenable, given the heavy burden on retail consumers on account of the hefty taxes on these products. Direct and second-round effects of the high fuel prices are fuelling inflation in an economy struggling to come out of the woods.

The base price charged by the OMCs to the dealer, and hence, the retail motor fuel prices touched all-time high levels across the country on July 17 and have since remained at roughly the same levels. Pump price of petrol in Delhi was Rs 101.84 per litre on Thursday and diesel was sold at Rs 89.47. In some other parts of the country, the prices are still higher, for example at Bhopal in Madhya Pradesh, the petrol and diesel were sold at Rs 110.2 per litre and Rs 98.26 per litre on Thursday.

Global crude prices started to come down after the Opec+ group, in mid-July, agreed to increase crude oil output by 0.4 million barrels per day for the August-December period. Following the announcement, crude had suddenly corrected from the highs of $77 per barrel to $68 per barrel. Subsequently, after hovering around $71-75 per barrel for the rest of July, the Indian basket of crude has gradually come down to the level of $68.9 per barrel now. The rise in crude prices in Q1FY22 was mainly supported by global demand recovery and voluntary production cuts until July-end from major oil exporting nations.

Analysts at Jefferies had pointed out on July 20 that if OMCs retain the benefit of the correction in crude prices, their marketing margins could go up to Rs 5.7 per litre on diesel and Rs 3.5 per litre for petrol, from nominal levels prevailed in mid-July. Apparently, the OMCs are deferring a much-awaited cut in the prices at which they sell the fuels to the dealer, to make up for the losses suffered between late February to May, when they could not hike the prices in conformity with the crude movements, due to the Assembly elections in four states and the UT of Puducherry.

“Gasoline marketing margins (near zero on July 20) could easily normalise if the fall in lower crude is retained by the OMCs,” Jefferies had said, adding that “diesel marketing margins (at Rs 2.9 per litre on July 20) could rise sharply in case crude settles at current levels with no change in retail selling price”.

As crude oil prices have firmed up in Q1FY22, there were delays in retail price increases, leading to the decline in average marketing margins for petrol. “OMCs’ margins were impacted due to no retail price changes over two months between February end and early May due to state elections,” analysts at Nomura had said earlier.

Credit Suisse said in April end that “with the state elections now over, we expect OMCs to resume retail price increase for auto fuel”, adding that “OMCs need to increase retail prices for diesel by Rs 2.8-3 a litre and gasoline petrol by Rs 5.5 a litre to maintain their FY20 margins. Petrol and diesel were priced at around Rs 90 a litre and Rs 80 per litre, respectively at that time. The subsequent hikes were much higher than what was anticipated, mainly due to constant rise in global crude rates from May to mid-July.

At present, the prices charged to dealers by OMCs are Rs 41.6 per litre for petrol and Rs 42.33 per litre for diesel. The Centre’s tax (basic excise, surcharge, agri-infra cess and road/infra cess) is currently Rs 31.80 per litre for diesel and Rs 32.90 per litre for petrol, while Delhi state VAT is Rs 23.50 per litre on petrol and Rs 13.14 per litre on diesel. In March and May 2020, surcharge and cess on auto fuels were cumulatively increased by Rs 13 per litre on petrol and Rs 16 per litre on diesel, leading to record-high auto fuel rates.

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