Petrol, Diesel Prices Set To Surge As Crude Spikes On Russia-Ukraine Crisis
Oil marketing companies in India haven’t revised petrol and diesel prices for more than 110 days despite rise in crude oil prices.
Analysts expect India’s oil companies to raise prices of retail fuel with their marketing margins squeezed on the back of a surge in crude.
Brent crude has crossed $100 a barrel, the highest in seven-and-a-half years, after Russia ordered strikes on Ukraine, according to Bloomberg data. The Indian basket of crude has also hit September 2014 levels—up 9% so far in 2022.
The international prices are expected to remain elevated on account of geopolitics. A gradual recovery in global oil demand due to easing Covid-19 curbs and a slower-than-expected hike in OPEC+ monthly output are other supporting factors.
That pause comes after retail prices fell from their historic highs in November 2021 on a cut in excise duty by the central government and VAT reductions by several states. Petrol and diesel in Delhi, according to Bloomberg data, currently cost Rs 95.41 and Rs 86.67 a litre, respectively.
Analysts told BloombergQuint that an increase in prices of petrol and diesel is imminent once the last phase of Uttar Pradesh assembly elections ends on March 7. That's because, given the rise in global crude prices, retail fuel prices in India should be at least 5% higher than the prevailing rates.
“At the current Brent prices, petrol and diesel are estimated to be Rs 8-9 higher than what they are,” Bhanu Patni, senior analyst, India Ratings & Research, told BloombergQuint over the phone. The OMCs may raise retail prices in a phased manner. Also, the prices may be streamlined through tax cuts but that will be determined by the fiscal space available with the government, Patni said.
The surge in oil prices has squeezed the marketing margins for oil firms. “Starting January third week, the marketing margins of OMCs have come down to negligible levels. That’s expected to continue for the last week of February and for a couple of weeks in March,” Probal Sen, energy analyst at ICICI Securities, told BloombergQuint. A retail price hike of around Rs 5.5 a litre will be needed to maintain the margin.
According to Motilal Oswal, OMCs will generate gross marketing margins of - Rs 1.8 a litre and - Rs 1 a litre on petrol and diesel at prevailing benchmark prices compared with Rs 2.3 and Rs 5.2, respectively, in the nine months ended December.
OMCs are making losses on petrol and diesel. The inability to pass on the cost inflation amid ongoing state elections, the brokerage said in a report, questions their independence, thereby taking valuation multiples back to the time when prices used to be regulated.
Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. traded at an average one-year forward price-to-book value of 0.9 times, 1.4 times, and 0.8 times, respectively, during FY12-15. They are currently trading at 0.8, 1.5, and 1.0 times, respectively, on constant interventions either through excise duty revisions or during elections in key states amid rising oil prices, poor refining margin environment, and inadequate consumption of petroleum products due to the pandemic.