Oil Retailers’ Troubles Return With Election Season
Automotive fuel prices have remained unchanged for 22 days this month, ahead of crucial assembly elections in four states. That’s expected to squeeze the margins of India’s oil marketers.
On March 24, prices of petrol and diesel were cut by 18 paise and 17 a litre, respectively, tracking a fall in India basket of crude. According to Bloomberg data, the two fuels retail at Rs 90.99 and Rs 81.3 a litre—still hovering near record highs.
“The halt in retail prices of auto fuels will reduce the marketing margins of OMCs as these companies are absorbing the impact of high crude oil prices,” Prashant Vasisht, vice-president and co-head of corporate ratings at ICRA Ltd., told BloombergQuint in an emailed response.
That comes as prices of the Indian basket of crude oil rose to $68 per barrel on March 15—the highest since Jan. 8, 2020—before dropping below the $63-mark. It fell more than 8% since March 15, after scaling a 14-month high. The crude oil prices, according to Bloomberg data, are still up nearly 23% so far this year.
The slight drop in crude prices was led by rising treasury yields that pushed up the dollar, unwinding of long positions by commodity traders, and signs of weak consumption in Asia. However, investment banks like Goldman Sachs and Morgan Stanley, according to a Bloomberg report, expect oil demand to recover as supplies are likely to tighten.
The rise in international fuel prices in March haven’t been fully passed to customers, ICICI Securities said in a recent report. As a result, the net marketing margin fell from Rs 3.47 per litre in the second week of December 2020 to Rs 0.09 per litre on March 18, it said. The metric stood at Rs 0.81 per litre this month till March 18—the lowest in the ongoing financial year.
If no hikes are implemented, the margin would dip to Rs -0.16 per litre on April 1, the report said citing international prices as on March 16-17.
Relief For Retailers
As the lower marketing margins squeeze oil marketers’ margins, they can seek relief from higher gross refining margins.
Benchmark Singapore GRMs recovered to a six-quarter high of $1.9 per barrel in the fourth quarter of the ongoing fiscal compared with -$0.9 per barrel in the first. That was led by global oil demand recovery following the pandemic and rollout of vaccines and reduction in U.S. refinery utilisation levels after snowstorms.
ICICI Securities said it’s optimistic the government will ensure healthy net marketing margins through additional fuel price hikes or excise duty cuts. This is because higher auto fuel marketing margins are crucial to the success of Bharat Petroleum Corp.’s privatisation, it said, adding retail price hikes worth Rs 3.15 per litre are required to keep margins healthy.
The recent cut in fuel prices could further dent the marketing margins if crude start rising again during elections.
(Updates an earlier version to add reduction in prices announced on March 24)