India’s Fuel Prices Seen Rising Despite Falling Demand

State-run oil firms, after a pause of 65 days during the state elections, have started increasing prices of petrol and diesel to recover losses on marketing margins.

That’s despite consumption of transport fuels falling to the lowest in several months as the Covid-19 resurgence has overwhelmed India’s healthcare system, forcing local lockdowns. Bloomberg reported citing officials with direct knowledge of the matter that petrol and diesel demand fell 6.3% and 1.7%, respectively, over the previous month in April.

Global oil prices, however, rose in the past few weeks because of a strong demand recovery in the U.S. and a weak dollar. The Brent futures rose to their highest in seven weeks at $69.7 a barrel on May 5. The Bloomberg Dollar Spot Index fell more than 1% in the last month.

Because of the state polls and small dips in crude prices in March and April, oil firms marginally cut petrol and diesel rates four times. Yet, so far this year, the Indian basket of crude has jumped more than 30%. By comparison, petrol and diesel have turned costlier by 8.7% and 10.2%, respectively.

That has put pressure on whey they earn from the sale of every litre of fuel. The marketing margins of oil retailers stood at 0.42 a litre in March compared with the FY21 average Rs 3.2.

In the last three days, oil retailers increased prices of the two fuels by Rs 59 paise and Rs 69 paise, respectively. Petrol and diesel retail in Delhi at Rs 90.99 and Rs 81.42 a litre, respectively. The prices are hovering around record highs, mostly because of high taxes.

Analysts said they will need to hike prices further to get margins back to usual levels.

Kotak Securities: Normalised Ebitda of oil firms is expected to decline sequentially in the fourth quarter as higher underlying refining margins and sequential increase in domestic petroleum sales volumes will be offset by the sharp decline in auto fuel marketing margins.

Prabhudas Lilladher: Marketing margins for Q4 are likely to contract as retail fuel prices were left unchanged given state elections, despite a jump in crude prices. That is expected to impact earnings.

Jefferies: Calculated margin based on daily prices for petrol has been negative since early March. “For diesel, margins are a fraction of normative levels. If crude sustains at $65, our calculations suggest Rs 2.5-7/litre hike in diesel and petrol prices to restore normative margins.”

JPMorgan: Apart from the pause during the polls and firm crude prices, rupee depreciation also lowered gross margins. At spot Brent prices and rupee (Rs 74.5 against the dollar in April), retail prices would need to increase by 3-4%, it said. And if Brent were to rise to $70 a barrel, retail prices would need to increase by 5-6%, it said.

Emkay Global: Oil retailers may look at hiking pre-VAT prices by Re 1 to Rs 3 a litre.

ICICI Securities said in a report that net marketing margins are at a 12-quarter low at 0.79 a litre in the first 21 days of the fiscal 2022. But it’s optimistic that government will ensure healthy net marketing margins of around Rs 2.5 a litre, either through additional fuel price hikes or excise duty cuts that are not passed on. This is because, it said, robust auto fuel marketing margins are crucial to the success of Bharat Petroleum Corp.’s privatisation.

Saudi Arabia’s decision to reduce pricing for June shipments to Asia between 10 and 30 cents per barrel will help stabilise prices at the pump or could limit the quantum of the future price hikes. But it will only help recover a small part of the losses on marketing margins.