The rally of global oil prices on one hand, and the freeze on retail petrol and diesel prices on the other, has cut the average margins of oil marketing companies (OMCs) by about Rs 2 to Rs 3 per litre since April 2018.
As crude oil prices rose 3 per cent from January to April, OMCs raised retail prices by 5.4 per cent, passing on the burden to consumers. But, from April 1 to May 13, when oil prices rose 18 per cent, oil companies increased retail prices by just 1 per cent.
In the same April-May period, Indian Oil Corporation’s (IOCL) marketing margins reduced from an estimated Rs 3.5 per litre to Rs 0.9 per litre for petrol, while from Rs 4.1 per litre to Rs 1 per litre for diesel.
As a result, OMCs are letting go about Rs 350 million on a daily basis since the start of this month, according to a Business Standard analysis based on the average consumption of both fuels. On annualised basis, a one-rupee reduction in margin results in an annual revenue shortfall of Rs 130 billion for OMCs.
Political observers say that due to Karnataka assembly election 2018, the government avoided any rise in retail price of fuels. However, it didn't do so by reducing its own revenue stream by cutting excise duties, but by squeezing the margins of state-owned oil companies.
While retail prices followed global oil prices from January to April, the Karnataka election forced the government to shun market-linked pricing after April as they indirectly controlled retail prices by squeezing OMC profits.
Sources from multiple OMCs told Business Standard that the companies are going to recover the losses incurred in the first two weeks of May in upcoming weeks through daily upward revisions.
It is widely believed in industry circles that with Karnataka assembly polls over, OMCS may hedge for a bigger retail price hike this time, to the tune of Rs 1.5 to Rs 2 per litre over two weeks.
If global prices continue to rise, or even remain stable, a serious dent to the profits of OMCs and dividend to the union government cannot be ruled out.
The dividend of oil companies— refineries as well as OMCs— to the central government came down 16 per cent in 2017-18, to Rs 146 billion from Rs 175 billion in 2016-17, the highest ever achieved.
Officials confirmed the quantum of potential loss due to a squeeze in margins. “Every Re 1 of marketing margin absorbed by the OMCs for a year may lead to a loss of Rs 110 billion for them," said a source close to the development.
Margins dropping below a rupee per litre will have an impact on the first quarter performance of OMCs. However, stocks of OMCs are facing north.
Stock prices of Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and IOCL had crashed 6-7 per cent intra-day in April when the government had publicly asked them to absorb losses. Since then, analysts say, value-buying is slowly pushing the stock up, since the April low was perceived as the nadir.
OMCs have not voiced any concern as of now, and are assessing the potential losses due to the margin squeeze. IOCL chairman Sanjiv Singh said that the price hike has been avoided to reduce pain to the consumer.
Throughout the year till May, the component of taxes in retail fuel prices—union’s excise duty and states’ value-added tax—has been fairly constant at about Rs 38 per litre for petrol and Rs 27 per litre for diesel (figures for Delhi). The two rupee per litre cut in basic excise duties in October 2017 cost the government Rs 130 billion in 2017-18, according to estimates.
According to sources, the government is likely to cut excise duty soon, to alleviate the situation of OMCs and prevent resultant increase in selling price at petrol stations. In a similar fashion to the revenue loss of marketing companies, the government too loses the same quantum: about Rs 130 billion on an annual basis due to a Re 1 cut.
As of now, the excise duty on petrol stands at Rs 19.48 per litre and Rs 15.33 per litre on diesel. Brent crude closed at $77.12 a barrel last week, while Indian basket price was $75.26 per barrel on Saturday.
| FROZEN RETAIL PRICES RATTLE OMC REVENUES | |||||||
| PETROL | DIESEL | ||||||
| Date | Crude oil price (Indian basket) ($/bbl) | Price to consumer (Rs/ltr) | OMC margin (Rs/ltr) | Date | Crude oil price (Indian basket) ($/bbl) | Price to consumer (Rs/ltr) | OMC marketing margin (Rs/ltr) |
| January 1, 2018 | 61.95 | 69.97 | 1.73 | January 1, 2018 | 61.95 | 59.7 | 1.42 |
| April 1, 2018 | 63.76 | 73.73 | 3.38 | April 1, 2018 | 63.76 | 64.58 | 3.77 |
| May 13, 2018 | 75.26 | 74.63 | 0.63 | May 13, 2018 | 75.26 | 65.93 | 0.80 |
| Source: Petroleum Planning and Analysis Cell, Indian Oil Corp; Necessary corrections have been made to arrive at 'Cost to OMCs' from the data on price build up; Figures for IOC at Delhi | |||||||